Existing law, the Control, Regulate and Tax Adult Use of Marijuana Act (AUMA), an initiative measure, authorizes a person who obtains a state license under AUMA and any applicable local ordinances to engage in commercial adult-use cannabis activity pursuant to that license, if conducted as prescribed. Existing law, the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), among other things, consolidates the licensure and regulation of commercial medicinal and adult-use cannabis activities and, except as specified, prohibits a person or entity from engaging in commercial cannabis activity without a state license issued by the Department of Cannabis Control pursuant to MAUCRSA. Existing law provides that a person engaging in commercial cannabis activity without a license is subject to civil penalties, as specified, and authorizes the Attorney General, a county counsel, a city attorney, or a city prosecutor to bring an action, as specified.

This bill would authorize a licensee under MAUCRSA to bring an action in superior court against a person engaging in commercial cannabis activity without a license as required by MAUCRSA. The bill would require the licensee to demonstrate actual harm resulting from the unlicensed commercial cannabis activity. The bill would authorize a court in that action to enter an order enjoining the defendant from engaging in commercial cannabis activity without a license. The bill would entitle a licensee prevailing in that action to their reasonable attorneys fees and costs and either actual damages or statutory damages not to exceed $75,000, as specified. The bill would provide that its provisions do not apply to a violation of the Labor Code and would prohibit the provisions from forming the basis for a cause of action under the Labor Code Private Attorneys General Act of 2004.

AUMA authorizes the Legislature to amend its provisions with a ²/₃ vote of both houses to further its purposes and intent, except as specified.

This bill would declare that its provisions further the purposes and intent of AUMA.

Existing law, the Control, Regulate and Tax Adult Use of Marijuana Act (AUMA), an initiative measure, authorizes a person who obtains a state license under AUMA and any applicable local ordinances to engage in commercial adult-use cannabis activity pursuant to that license, if conducted as prescribed. Existing law, the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), among other things, consolidates the licensure and regulation of commercial medicinal and adult-use cannabis activities and, except as specified, prohibits a person or entity from engaging in commercial cannabis activity without a state license issued by the Department of Cannabis Control pursuant to MAUCRSA. Existing law provides that a person engaging in commercial cannabis activity without a license is subject to civil penalties, as specified, and authorizes the Attorney General, a county counsel, a city attorney, or a city prosecutor to bring an action, as specified.

This bill would authorize a licensee under MAUCRSA to bring an action in superior court against a person engaging in commercial cannabis activity without a license as required by MAUCRSA. The bill would require the licensee to demonstrate actual harm resulting from the unlicensed commercial cannabis activity. The bill would authorize a court in that action to enter an order enjoining the defendant from engaging in commercial cannabis activity without a license. The bill would entitle a licensee prevailing in that action to their reasonable attorneys fees and costs and either actual damages or statutory damages not to exceed $75,000, as specified. The bill would provide that its provisions do not apply to a violation of the Labor Code and would prohibit the provisions from forming the basis for a cause of action under the Labor Code Private Attorneys General Act of 2004.

AUMA authorizes the Legislature to amend its provisions with a ²/₃ vote of both houses to further its purposes and intent, except as specified.

This bill would declare that its provisions further the purposes and intent of AUMA.

Existing law, the Control, Regulate and Tax Adult Use of Marijuana Act (AUMA), an initiative measure, authorizes a person who obtains a state license under AUMA and any applicable local ordinances to engage in commercial adult-use cannabis activity pursuant to that license, if conducted as prescribed. Existing law, the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), among other things, consolidates the licensure and regulation of commercial medicinal and adult-use cannabis activities and, except as specified, prohibits a person or entity from engaging in commercial cannabis activity without a state license issued by the Department of Cannabis Control pursuant to MAUCRSA. Existing law provides that a person engaging in commercial cannabis activity without a license is subject to civil penalties, as specified, and authorizes the Attorney General, a county counsel, a city attorney, or a city prosecutor to bring an action, as specified.

This bill would authorize a licensee under MAUCRSA to bring an action in superior court against a person engaging in commercial cannabis activity without a license as required by MAUCRSA. The bill would require the licensee to demonstrate actual harm resulting from the unlicensed commercial cannabis activity. The bill would authorize a court in that action to enter an order enjoining the defendant from engaging in commercial cannabis activity without a license. The bill would entitle a licensee prevailing in that action to actual damages, specified statutory damages not to exceed $500,000, and their reasonable attorneys fees and costs. costs and either actual damages or statutory damages not to exceed $75,000, as specified. The bill would provide that its provisions do not apply to a violation of the Labor Code and would prohibit the provisions from forming the basis for a cause of action under the Labor Code Private Attorneys General Act of 2004.

AUMA authorizes the Legislature to amend its provisions with a ²/₃ vote of both houses to further its purposes and intent, except as specified.

This bill would declare that its provisions further the purposes and intent of AUMA.

Existing law, the Control, Regulate and Tax Adult Use of Marijuana Act (AUMA), an initiative measure, authorizes a person who obtains a state license under AUMA and any applicable local ordinances to engage in commercial adult-use cannabis activity pursuant to that license, if conducted as prescribed. Existing law, the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), among other things, consolidates the licensure and regulation of commercial medicinal and adult-use cannabis activities and, except as specified, prohibits a person or entity from engaging in commercial cannabis activity without a state license issued by the Department of Cannabis Control pursuant to MAUCRSA. Existing law provides that a person engaging in commercial cannabis activity without a license is subject to civil penalties, as specified, and authorizes the Attorney General, a county counsel, a city attorney, or a city prosecutor to bring an action, as specified.

This bill would authorize a licensee under MAUCRSA to bring an action in superior court against a person engaging in commercial cannabis activity without a license as required by MAUCRSA. The bill would require the licensee to demonstrate actual harm resulting from the unlicensed commercial cannabis activity. The bill would authorize a court in that action to enter an order enjoining the defendant from engaging in commercial cannabis activity without a license. The bill would require a court in that action to award entitle a licensee prevailing plaintiff in that action to actual damages, specified statutory damages not to exceed $500,000, and their reasonable attorneys fees and costs.

Existing law, the Control, Regulate and Tax Adult Use of Marijuana Act (AUMA), an initiative measure, authorizes a person who obtains a state license under AUMA and any applicable local ordinances to engage in commercial adult-use cannabis activity pursuant to that license, if conducted as prescribed. Existing law, the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), among other things, consolidates the licensure and regulation of commercial medicinal and adult-use cannabis activities and, except as specified, prohibits a person or entity from engaging in commercial cannabis activity without a state license issued by the Department of Cannabis Control pursuant to MAUCRSA. Existing law provides that a person engaging in commercial cannabis activity without a license is subject to civil penalties, as specified, and authorizes the Attorney General, a county counsel, a city attorney, or a city prosecutor to bring an action, as specified.

Existing law, the Control, Regulate and Tax Adult Use of Marijuana Act (AUMA), an initiative measure, authorizes a person who obtains a state license under AUMA and any applicable local ordinances to engage in commercial adult-use cannabis activity pursuant to that license, if conducted as prescribed. Existing law, the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), among other things, consolidates the licensure and regulation of commercial medicinal and adult-use cannabis activities and, except as specified, prohibits a person or entity from engaging in commercial cannabis activity without a state license issued by the Department of Cannabis Control pursuant to MAUCRSA.

This bill would declare the intent of the Legislature to enact legislation to reduce the number of unlicensed cannabis businesses and operators and to provide local and state agencies with additional tools to assist in the enforcement of existing cannabis statutes and regulations.

CONCURRENCE IN SENATE AMENDMENTS

CSA1 Bill Id:AB 1171

Author:(Blanca Rubio)

As Amended Ver:July 5, 2023

2/3 vote

SUMMARY

Authorizes a person licensed under the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) to bring an action in superior court against a person engaging in commercial cannabis activity without a license, as specified.

Senate Amendments

1. Limit damages to either actual damages or statutory damages rather than both.
2. Limit the statutory damages to $75,000.
3. Delete the factors the court must consider in assessing statutory damages.
4. Specify that the bill does not apply to any violation of the Labor Code committed by a person engaging in unlicensed cannabis activity and does not form the basis for a cause of action under the Labor Code Private Attorneys General Act of 2004.

COMMENTS

Background. The Medicinal and Adult Use Cannabis Regulation and Safety Act (MAUCRSA), which incorporates prior cannabis laws, authorizes a person who obtains a state license under MAUCRSA to engage in commercial adult-use cannabis activity under that license and applicable local ordinances. It is unlawful to operate a cannabis business without a license.

The Department of Cannabis Control (DCC) is the California state agency that licenses and regulates cannabis businesses. DCC regulates the:

1. Growing of cannabis plants.
2. Manufacture of cannabis products.
3. Transportation and tracking of cannabis goods throughout the state.
4. Sale of cannabis goods.
5. Events where cannabis is sold or used.
6. Labeling of goods sold at retail.

Unlicensed Market. As noted during the February 25, 2020, joint informational hearing between this Committee and the Assembly Budget Subcommittee No. 4 on State Administration, there have been significant concerns over cannabis operations that continue to do business outside of the regulatory scheme. They can avoid taxes and compete with lawful businesses. They also create the potential for consumer and environmental harm, avoiding testing and agricultural requirements.

Normally, licensing agencies regulate problematic licensed and unlicensed activity by imposing administrative penalties against an existing license, the strongest of which is revocation of the license, or by withholding the issuance of a license until any problems or deficiencies are addressed. The difficulty in regulating unlicensed businesses that do not plan to obtain a license, including unlicensed cannabis businesses, is that there is no incentive to comply with the administrative penalties because the license is irrelevant to them.

As a result, MAUCRSA authorizes the DCC, after the exhaustion of the administrative and judicial review procedures, to apply to the superior court for a judgment in the amount of any administrative fines and an order compelling the cited person to comply with the DCC order. A violation of a court order is a misdemeanor.

It also establishes various civil penalties which are sought in court and are not tied to the licensing process, which can be brought by the DCC, the Attorney General, or local public attorneys. There are individual penalties of up to three times the amount of the required license fee (which vary based on gross annual revenue, up to $300,000 for a microbusiness with gross annual revenue of $80 million). There are also civil penalties of up to $30,000 per day of operation for aiding and abetting unlicensed cannabis activity, which means a person encouraged, aided, or facilitated the activity.

Additionally, it is punishable by up to one year in county jail, which increases per violation, for someone who has management or control of a property (including an employee who works at the property) that knowingly makes the property available for the unlawful manufacturing, storing, or distributing a controlled substance for sale or distribution, including cannabis.

This bill would establish a new private right of action, allowing individual licensees to sue an unlicensed cannabis operation. It would require the licensees to prove actual damages from the unlicensed activity and authorize a court to issue an injunction prohibiting the unlicensed activity. It would entitle the prevailing plaintiff to either actual damages or statutory damages of up to $75,000 and reasonable attorney’s fees and costs.

According to the Author

"[This bill] seeks to empower legal and fully licensed cannabis operators to petition the court to issue an injunction against non-licensed operators. This additional enforcement tool is essential given that the local and state agencies responsible for cannabis enforcement are insufficiently resourced to meet the challenge of California's enormous and rapidly growing illegal cannabis industry.”

Arguments in Support

The San Diego & Imperial Counties Joint Labor Management Cannabis Committee (JLM) (sponsor) writes in support:

The JLM is a joint venture between UFCW Local 135, which represents over 13,000 unionized employees, and March and Ash, a community-oriented chain of cannabis dispensaries in Southern California…. Five years after the passage of the Adult Use of Marijuana Act (AUMA, Proposition 64 2018), we now find the legal market at risk, including its high-road employers, community entrepreneurs, and contribution to California's vibrant economy.

Today, good operators in the licensed cannabis industry are under siege on three fronts. They are losing substantial market share to illegal cannabis operators, to licensed cannabis operators operating outside the regulated market, and to companies selling high-potency synthetic THC-like products under the guise of hemp.

Unfortunately, state and local enforcement has been unable to keep up with the growing illicit market. In short, more needs to be done to clamp down on entities illegally selling intoxicating cannabis and cannabis-like products outside of the regulated framework. [This bill] will empower licensed operators to seek judicial relief against their illegal competitors by giving them standing in Superior Court to seek a permanent injunction against unlicensed operators

The devastating impact of this illicit competition is seen in the form of dramatically decreased tax revenue. Between Q2 2021 and Q4 2022, the CDTFA reports that Cannabis Excise Tax Revenue has dropped by 40% [https://www.cdtfa.ca.gov/dataportal/dataset.htm?url=CannabisTaxRevenues].

There is no sign that that download trajectory is slowing. According to Headset, a real-time industry data-tracking company, legal cannabis sales have been in decline for 22 months. In May 2022, there were close to 1,500 brands in the market. Less than a year later, only about 1,000 remain. Some of the largest multi-state operators have exited the California market, characterizing operating conditions as "brutal" and the investment climate as "toxic."

The persistence of the illicit cannabis market continues to put workers' lives at risk, degrade our natural resources, endanger community safety, and undermine the stability of the state's cannabis tax revenue.

We must do more to enforce existing law, to complement our ongoing support for the legal cannabis market.

Arguments in Opposition

None on file

FISCAL COMMENTS

According to the Senate Appropriations Committee, unknown court workload cost pressures to the extent this bill results in increased litigation as a result of cannabis licensees bringing civil actions against persons engaging in unlicensed commercial cannabis activity (Trial Court Trust Fund, General Fund). See Staff Comments for additional details.

The Department of Cannabis Control (DCC) does not anticipate additional costs or workload associated with this bill.

VOTES:

ASM BUSINESS AND PROFESSIONS: 15-2-1

YES: Berman, Alanis, Alvarez, Bonta, Chen, Gipson, Grayson, Irwin, Jackson, Lee, Lowenthal, McCarty, McKinnor, Stephanie Nguyen, Ting

NO: Dixon, Joe Patterson

ABS, ABST OR NV: Flora

ASM JUDICIARY: 10-0-1

YES: Maienschein, Essayli, Connolly, Haney, Kalra, Pacheco, Papan, Reyes, Robert Rivas, Sanchez

ABS, ABST OR NV: Dixon

ASSEMBLY FLOOR: 69-0-11

YES: Addis, Aguiar-Curry, Alanis, Alvarez, Arambula, Bains, Bauer-Kahan, Bennett, Berman, Boerner, Bonta, Bryan, Calderon, Juan Carrillo, Wendy Carrillo, Cervantes, Chen, Connolly, Davies, Essayli, Mike Fong, Gabriel, Gallagher, Garcia, Gipson, Grayson, Haney, Hart, Hoover, Irwin, Jackson, Jones-Sawyer, Kalra, Lackey, Lee, Low, Lowenthal, Maienschein, McCarty, McKinnor, Muratsuchi, Stephanie Nguyen, Ortega, Pacheco, Papan, Pellerin, Petrie-Norris, Quirk-Silva, Ramos, Reyes, Luz Rivas, Robert Rivas, Rodriguez, Blanca Rubio, Sanchez, Santiago, Schiavo, Soria, Ting, Valencia, Villapudua, Wallis, Ward, Weber, Wicks, Wilson, Wood, Zbur, Rendon

ABS, ABST OR NV: Megan Dahle, Dixon, Flora, Vince Fong, Friedman, Holden, Mathis, Jim Patterson, Joe Patterson, Ta, Waldron

SENATE FLOOR: 39-0-1

YES: Allen, Alvarado-Gil, Archuleta, Ashby, Atkins, Becker, Blakespear, Bradford, Cortese, Dahle, Dodd, Durazo, Eggman, Glazer, Gonzalez, Grove, Hurtado, Jones, Laird, Limón, McGuire, Menjivar, Min, Newman, Nguyen, Niello, Ochoa Bogh, Padilla, Portantino, Roth, Rubio, Seyarto, Skinner, Smallwood-Cuevas, Stern, Umberg, Wahab, Wiener, Wilk

ABS, ABST OR NV: Caballero

UPDATED

VERSION: July 5, 2023

CONSULTANT: Vincent Chee / B. & P. / (916) 319-3301 FN: 0002365

 THIRD READING  

Bill No: AB 1171

Author: Blanca Rubio (D), et al.

Amended: 7/5/23 in Senate

Vote: 27

SENATE BUS., PROF. & ECON. DEV. COMMITTEE: 11-0, 7/3/23

AYES: Roth, Nguyen, Alvarado-Gil, Archuleta, Ashby, Becker, Eggman, Glazer, Smallwood-Cuevas, Wahab, Wilk

NO VOTE RECORDED: Dodd, Niello

SENATE JUDICIARY COMMITTEE: 11-0, 7/11/23

AYES: Umberg, Wilk, Allen, Ashby, Caballero, Durazo, Laird, Min, Niello, Stern, Wiener

SENATE APPROPRIATIONS COMMITTEE: 7-0, 9/1/23

AYES: Portantino, Jones, Ashby, Bradford, Seyarto, Wahab, Wiener

ASSEMBLY FLOOR: 69-0, 5/15/23 - See last page for vote

SUBJECT: Cannabis: private right of action

SOURCE: UFCW Western States

San Diego/Imperial Counties Joint Labor Management Cannabis Committee

DIGEST:

This bill authorizes a licensee under the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) to bring a civil action in superior court against a person engaging in commercial cannabis activities without a license, as specified.

ANALYSIS:

Existing law:

1. Establishes the Department of Cannabis Control (DCC) to administer and regulate provisions of MAUCRSA. (Business and Professions Code (BPC) § 26010)
   
2. Subjects a person engaging in commercial cannabis activity without a required licensed under MAUCRSA to civil penalties of up to three times the amount of the license fee for each violation, and each day constitutes a new violation. (BPC § 26038(a)(1))
   
3. Subjects a person who has management or control of a commercial property, or a commercial building, room, space, or enclosure either as an owner, lessee, agent, employee or mortgagee who knowingly rents, leases, or makes available for use, with or without compensation, the commercial property, commercial building, room, space, or enclosure for the purpose of the unlicensed commercial cannabis cultivation, manufacture, storage, sale or distribution of cannabis to a civil penalty of up to $10,000 for each violation, and each day constitutes a new violation. (BPC § 26038(a)(3))
   
4. Specifies who is to be reimbursed when collecting civil penalties associated with the investigation and to which fund the monies are to be deposited based on who brought forth the action, as specified. (BPC § 26038(c)(e))
   
5. Authorizes a peace officer, including a peace officer with the DCC, to seize cannabis products in any of the following circumstances, The cannabis or cannabis product is subject to recall or embargo by the DCC, subject to destruction, or is seized related to an investigation or disciplinary action. (BPC § 26039.4)
   
6. Authorizes the superior court for the county in which any person has engaged or is about to engage in any act which constitutes a violation of MAUCRSA to, upon a petition filed by the DCC, issue an injunction or other appropriate order restraining the conduct. (BPC § 26031.2(a))

This bill:

1. Provides that in addition to other remedies permitted by law, a licensee under MAUCRSA may bring an action in superior court against a person engaging in commercial cannabis activity without a required license.
   
2. Requires a licensee to demonstrate actual harm resulting from the unlicensed commercial cannabis activity in order to prevail in an action brought pursuant to 1) above.
   
3. Authorizes a court to enter an order enjoining the defendant from engaging in commercial cannabis activity without a license in an action pursuant to 1) above.
   
4. Makes a licensee who prevails in an action pursuant to 1) above entitled to both the following:
   
   1. Either of the following damages, at the election of the prevailing licensee:
      
      1. Actual damages caused by the unlicensed commercial cannabis activity; or,
      2. Statutory damages not to exceed $500,000
         
   2. Reasonable attorney’s fees and costs.
      
5. States that this bill does not apply to any violation of the Labor Code committed by a person engaging in unlicensed cannabis activity and not form the basis for a cause of action under the Labor Code Private Attorneys General Act, as specified.

Background

Under current law, a cannabis license is required for every corner of the cannabis market, including growing cannabis, transporting cannabis, making cannabis products, testing cannabis products, selling cannabis, and holding an event where cannabis is sold. Each license type is distinct and must be approved before operating.

The illicit cannabis market and those operating without local or state oversight do not abide by any of California’s current state licensing requirements and do not remit the proper payments into the Cannabis Tax Fund, which is designated for the collection of state cannabis excise tax. Monies from the fund are dedicated to regulatory and administrative costs, reimbursing certain state agencies for reasonable costs associated with implementing, administering, and enforcing MAUCRSA.

Business and Professions Code Section 26038 details penalties for unlicensed commercial cannabis activity. A person engaging in commercial cannabis without a license is subject to civil penalties. Further, the DCC is permitted to destroy cannabis seized as part of a violation of operating without a license and the DCC can seek reimbursement for the costs of the enforcement process. It is currently illegal to grow, distribute, sell, deliver, transport, and make cannabis products etc., without obtaining the appropriate state or local license and authorization.

Current law specifies the parameters for assessing civil penalties, which are sought in court. Under current law, an action for civil penalties can be brought by the DCC, the Attorney General, or local public attorneys. There are individual penalties of up to three times the amount of the required license fee for each violation, and each day constitutes a separate violation. There are also civil penalties of up to $30,000 per day of operation for aiding and abetting unlicensed cannabis activity, which means a person encouraged, aided, or facilitated the activity. There are also civil penalties of up to $10,000 per day for a person who provides property, including providing the space, enclosures, rents, etc. for the purpose of unlicensed commercial activity.

Under current law, the civil penalties assed are collected by either the DCC, the AG or a local city attorney and divided amongst administrative costs to the prosecuting agency with the balance deposited into the General Fund.

This bill expressly authorizes a licensee to bring a civil action in superior court against a person engaging in commercial cannabis activity without a license. This bill proposes a unique new way to address the illicit cannabis market in California. In order to prevail in a case, a licensee would need to demonstrate “actual harm” incurred by the unlicensed activity.

A private right of action allows a private person or persons to enforce their rights under a particular statute. Private rights of action can be express or implied. Express rights explicitly outline in statute how a person or persons can enforce their rights in court, and against whom. Implied rights are rights that a statute may contain, or are assumed to contain, usually based on a previous judicial opinion outlining and confirming the existing right. The question as to whether a private right of action should exist in a statute is a common one in the Legislature, where proponents often argue explicitly providing these statutory rights expands access to justice for private citizens, and opponents are concerned about creating unnecessary lawsuits that will backlog courts and create additional, unnecessary expenses for individuals or business owners.

FISCAL EFFECT: Appropriation: No Fiscal Com.: No Local: No

According to the Senate Committee on Appropriations, this bill will result in unknown court workload cost pressures to the extent this bill results in increased litigation as a result of cannabis licensees bringing civil actions against persons engaging in unlicensed commercial cannabis activity. DCC does not anticipate additional costs or workload associated with this bill.

SUPPORT: (Verified 9/1/23)

United Food and Commercial Workers, Western States Council (co-source)

San Diego/Imperial Counties Joint Labor Management Cannabis Committee (co-source)

California Association of Professional Scientists

California Cannabis Industry Association

County of Santa Barbara

OPPOSITION: (Verified 9/1/23)

None received

ARGUMENTS IN SUPPORT: Supporters note generally that this bill will help address the illicit cannabis market and provide an additional tool to address the illicit market.

ASSEMBLY FLOOR: 69-0, 5/15/23

AYES: Addis, Aguiar-Curry, Alanis, Alvarez, Arambula, Bains, Bauer-Kahan, Bennett, Berman, Boerner, Bonta, Bryan, Calderon, Juan Carrillo, Wendy Carrillo, Cervantes, Chen, Connolly, Davies, Essayli, Mike Fong, Gabriel, Gallagher, Garcia, Gipson, Grayson, Haney, Hart, Hoover, Irwin, Jackson, Jones-Sawyer, Kalra, Lackey, Lee, Low, Lowenthal, Maienschein, McCarty, McKinnor, Muratsuchi, Stephanie Nguyen, Ortega, Pacheco, Papan, Pellerin, Petrie-Norris, Quirk-Silva, Ramos, Reyes, Luz Rivas, Robert Rivas, Rodriguez, Blanca Rubio, Sanchez, Santiago, Schiavo, Soria, Ting, Valencia, Villapudua, Wallis, Ward, Weber, Wicks, Wilson, Wood, Zbur, Rendon

NO VOTE RECORDED: Megan Dahle, Dixon, Flora, Vince Fong, Friedman, Holden, Mathis, Jim Patterson, Joe Patterson, Ta, Waldron

Prepared by: Elissa Silva / B., P. & E.D. / 916-651-4104

9/2/23 16:56:00

**** END ****

SENATE COMMITTEE ON

Senator Anthony Portantino, Chair

2023 - 2024 Regular Session

AB 1171 (Blanca Rubio) - Cannabis: private right of action

Bill Summary:

AB 1171 creates a private right of action allowing a licensee under the Medicinal and Adult-Use Cannabis Regulation and Safety Act to bring a civil action in superior court against a person engaging in unlicensed commercial cannabis activities.

Fiscal Impact:

Unknown court workload cost pressures to the extent this bill results in increased litigation as a result of cannabis licensees bringing civil actions against persons engaging in unlicensed commercial cannabis activity (Trial Court Trust Fund, General Fund). See Staff Comments for additional details.

The Department of Cannabis Control (DCC) does not anticipate additional costs or workload associated with this bill.

Background:

A private right of action allows a private person or persons to enforce their rights under a particular statute. Private rights of action can be express or implied. Express rights explicitly outline in statute how a person or persons can enforce their rights in court, and against whom. Implied rights are rights that a statute may contain, or are assumed to contain, usually based on a previous judicial opinion outlining and confirming the existing right. The question as to whether a private right of action should exist in a statute is a common one in the Legislature, where proponents often argue explicitly providing these statutory rights expands access to justice for private citizens, and opponents are concerned about creating unnecessary lawsuits that will backlog courts and create additional, unnecessary expenses for individuals or business owners.

Under this bill, a party with a valid cannabis license from the DCC can bring an action in superior court against a person engaging in unlicensed commercial cannabis activity, provided that the licensee can demonstrate that the unlicensed commercial cannabis activity caused them harm. The cause of action is available to all categories of licensees, from growers to retail shops.

Proposed Law:

• Authorizes a cannabis licensee to bring a private right of action in superior court against a person engaging in unlicensed commercial cannabis activity.
  • In order to prevail in the action, requires the licensee to demonstrate actual harm resulting from the unlicensed activity.
• In an action brought pursuant to the above, authorizes a court to enter an order enjoining a defendant from engaging in unlicensed commercial cannabis activity.
• Provides that a cannabis licensee who prevails in an action to be entitled to both of the following:
  • At the election of the prevailing licensee, either actual damages caused by the unlicensed commercial cannabis activity or statutory damages not to exceed $75,000.
  • Reasonable attorney’s fees and costs.
• States that the above shall not apply to any Labor Code violations committed by a person engaging in unlicensed cannabis activity and shall not form the basis for a cause of action arising under the Labor Code Private Attorneys General Act of 2004.

Staff Comments:

It is unknown how many additional civil actions would be brought as a result of this bill, but will depend on, among other things, the extent to which cannabis licensees may choose to bring a civil action of their own volition and resources against persons engaging in unlicensed cannabis activity rather than go through the DCC to file a complaint against an unlicensed cannabis business.

However, it generally costs about $8,000 to operate a courtroom for one eight-hour day. Although courts are not funded on the basis of workload, increased pressure on the trial courts and staff may create a need for increased funding for courts from the General Fund to perform existing duties. Numerous trial court operations are funded through the imposition and collection of criminal fines and fees. However, the Legislature has reduced and eliminated criminal fines and fees over the past decade. As a result, the 2023-24 budget includes an ongoing annual allocation of $105.1 million backfill from the General Fund in order to address declining revenue to the Trial Court Trust Fund.

-- END --

SENATE JUDICIARY COMMITTEE

Senator Thomas Umberg, Chair

2023-2024 Regular Session

Bill No: AB 1171 (Author:Blanca Rubio)

Version: July 5, 2023

Hearing Date: July 11, 2023

Fiscal: No

Urgency: No

Consultant: AWM

SUBJECT

Cannabis: private right of action

DIGEST

This bill creates a private right of action allowing a licensed commercial cannabis operator who has been harmed by an unlicensed cannabis operator to seek actual damages, statutory damages, and an injunction against the unlicensed cannabis operator.

EXECUTIVE SUMMARY

Although cannabis has been legal in California for medical use since the mid-1990s and for adult recreational use since 2016, an illicit market for cannabis products continues to flourish in the state. Operators engaging in unlicensed cannabis activity have significant economic advantages over their licensed counterparts, as unlicensed operators can avoid the costs of complying with state regulations, paying taxes, and properly testing products. In recent years, the Legislature has approved several measures aimed at strengthening civil enforcement of cannabis laws to prevent the illicit market from overtaking licensed cannabis businesses. However, due to a lack of state-level enforcement resources, these tools have been underutilized, and the legal cannabis industry continues to struggle in the face of unlawful competition.

The author and sponsor of the bill, recognizing that the state’s current budget situation is unlikely to produce significant new investment in enforcement resources, seek to empower licensed cannabis operations to enforce the law on their own. This bill thus creates a cause of action for a licensed cannabis business that is harmed by an unlicensed operator to file a civil suit against the unlicensed operator; if the licensed business prevails, it can recover actual damages or statutory damages, along with reasonable attorney fees and costs. Additionally, the court can enjoin the unlicensed operator from continuing to engage in unlicensed cannabis activities. The bill also clarifies that this private right of action does not extend to unlicensed cannabis businesses engaging in certain Labor Code violations.

This bill is sponsored by the San Diego/Imperial Counties Joint Labor Management Committee and is supported by the California Cannabis Industry Association and UFCW Western States Council. There is no known opposition. The Senate Business, Professions and Economic Development Committee passed this bill with a vote of 11-0.

PROPOSED CHANGES TO THE LAW

Existing law:

1. Establishes the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), which establishes a comprehensive system to control and regulate the cultivation, distribution, transport, storage, manufacturing, processing, and sale of medical cannabis and recreational cannabis for adults aged 21 years and older. (Bus. & Prof. Code, div. 10, §§ 26000 et seq.)
2. Establishes the Department of Cannabis Control (DCC), which has licensing and regulation authority under MAUCRSA, except where the authority is expressly delegated to another agency or department. (Bus. & Prof. Code, §§ 26010, 26012.)
3. Establishes 20 types of licenses for various commercial cannabis activates, including cultivation, manufacturing, testing, retail, distribution, and microbusiness; a licensee must designate whether the license is for adult-use or medicinal cannabis, except for the testing laboratory license. (Bus. & Prof. Code, § 26050.)
4. Prohibits a person from engaging in commercial cannabis license without a valid license issued by the DCC. (Bus. & Prof. Code, § 26037.5.)
5. Authorizes the DCC to issue a citation to a person engaging in unlicensed commercial cannabis activity
6. Provides civil penalties for persons engaging in unlicensed commercial cannabis activity, for persons aiding and abetting unlicensed commercial cannabis activity, and persons who knowingly rent or make available property for unlicensed commercial activity, as follows:
   1. For unlicensed commercial cannabis activity, the penalty is up to three times the license fee for each day of the violation; for aiding and abetting, the penalty is up to $30,000 for each violation, per day of the violation; for knowingly renting or making property available, the penalty is up to $10,000 per day of the violation.
   2. The statute of limitations is three years.
   3. Actions for aiding and abetting may be brought only by the Attorney General on behalf of the DCC, or by a city or county counsel or city prosecutor in a city or county having a population in excess of 750,000; actions for renting or making available property may be brought only by the Attorney General on behalf of the DCC or by a city or county counsel or city prosecutor.
   4. For aiding and abetting and renting/making available property, the prosecuting entity must establish additional factors regarding the defendant’s knowledge and significant role in the unlicensed cannabis operation. (Bus. & Prof. Code, § 26038.)
7. Provides that MAUCRSA, except where specified, does not supersede or limit the authority of a local jurisdiction to adopt and enforce local ordinances to regulate licensed cannabis businesses, 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 licensed commercial cannabis businesses. (Bus. & Prof. Code, § 26200.)

This bill:

1. Provides that, in addition to other remedies permitted by law, a cannabis licensee may bring a private right of action against a person engaging in unlicensed commercial cannabis activity.
   1. In order to prevail in the action, the licensee must demonstrate that they have suffered actual harm as a result of the unlicensed commercial cannabis activity.
2. Authorizes a court, in an action brought under 1), to enter an order enjoining a defendant from engaging in unlicensed cannabis activity.
3. Provides that a cannabis licensee who prevails in an action brought under 1) shall be entitled to the following:
   1. Either actual damages caused by the unlicensed commercial cannabis activity or statutory damages of up to $500,000.
   2. Reasonable attorney fees and costs.
4. Requires a court, in determining the amount of statutory damages to assess under 3)(b), to consider all of the following:
   1. The amount of money derived by the person engaging in commercial cannabis activity without a license.
   2. The number of licensed operations impacted by the unlawful conduct.
   3. The number of prior violations of state or local cannabis laws committed by the defendant.
   4. Any other factors the court deems to be within the interest of justice.
5. States that the above shall not apply to any Labor Code violations committed by a person engaging in unlicensed cannabis activity and shall not form the basis for a cause of action arising under the Private Attorneys General Act of 2004) (Lab. Code, §§ 2698-2699.8.)
6. States that the Legislature finds and declares that this bill furthers the purposes and intent of the Control, Regulate and Tax Adult Use of Marijuana Act (Proposition 64).

COMMENTS

1. Author’s comment

According to the author:

AB 1171 seeks to empower legal and fully licensed cannabis operators to petition the court to issue an injunction against non-licensed operators. This additional enforcement tool is essential given that the local and state agencies responsible for cannabis enforcement are insufficiently equipped to meet the challenge of California’s enormous and rapidly growing illegal cannabis industry.

2. Despite legalization, unlicensed cannabis activity in California remains prevalent

While cannabis remains a Schedule I narcotic under federal law,^[1] California has permitted medical cannabis use since 1996.^[2] Adult recreational cannabis use was approved by the voters in 2016,^[3] and the Legislature subsequently enacted MAUCRSA to streamline and synthesize the licensing and regulatory regimes for medical and recreational cannabis.^[4]

Although many cannabis operators opted to embrace the newly state-legal framework and obtain licenses, the illicit market for unlicensed products continues to flourish.^[5] The persistence of unlicensed cannabis operations harms licensed operators—unlicensed operators are able to offer lower prices than licensed operators because they do not have to pay licensing fees^[6]—and can also harm the customers, given that unlicensed products do not go through quality testing and can be tainted.^[7]

State and local enforcement agencies have taken steps to crack down on unlicensed cannabis, including through the creation of a Unified Cannabis Enforcement Taskforce.^[8] Stakeholders report, however, that these efforts are still insufficient to stem the tide of unlicensed cannabis, and that the prevalence of unlicensed businesses may cause licensed businesses to fail in large numbers. According to the California Cannabis Industry Association, writing in support:

The licensed cannabis industry continues to struggle with competition from an illicit market that is untaxed, unregulated, and untested. This entrenched unlicensed market accounts for approximately two-thirds of all cannabis sales in the state, according to a 2022 Reason Foundation report, and has resulted in numerous negative consequences, including an increase in cannabis-related violence, worker exploitation, and environmental damage. Competition from the illicit market also robs the state of about $2 billion in taxes per year.

3. This bill creates a private right of action for a licensed cannabis operator to seek damages from an unlicensed cannabis operator

While the Legislature has previously expanded the authority of state actors to seek civil penalties from unlicensed cannabis operators, individuals who aid and abet unlicensed cannabis operators, and individuals who knowingly rent to unlicensed cannabis operators,^[9] this bill cuts out the middleman and allows licensed commercial cannabis operators to sue the unlicensed cannabis businesses causing them harm.

Under this bill, a party with a valid cannabis license from the DCC can bring an action in superior court against a person engaging in unlicensed commercial cannabis activity, provided that the licensee can demonstrate that the unlicensed commercial cannabis activity caused them harm. The cause of action is available to all categories of licensees, from growers to retail shops. If the licensee prevails in the action, they are entitled to recover either the actual damages caused by the unlicensed activity or statutory damages of up to $500,000, as well as their attorney fees and costs. Additionally, the court may issue an injunction to prohibit the defendant from engaging in further unlicensed commercial cannabis activity.

As always, there is a concern that increased penalties for unlicensed commercial cannabis activity could lead to the same type of unequal enforcement that characterized the pre-legalization era, with Black people and other people of color being disproportionately targeted. There is also a concern that penalties that can be levied against low-level participants in the unlicensed market will do little to deter high-level unlicensed cannabis operators while leaving small-time players with crushing debt. This bill, however, is structured to incentivize suits against the more powerful owners and executives, because they are the ones who will actually be able to pay the damages. An unenforceable judgment against a low-level actor is unlikely to make financial sense to a licensee, especially because they would remain on the hook for their attorney fees and costs.

SUPPORT

San Diego/Imperial Counties Joint Labor Management Committee (sponsor)
California Cannabis Industry Association

UFCW Western States Council

OPPOSITION

None known

RELATED LEGISLATION

Pending Legislation:

SB 820 (Alvarado-Gil, 2023) allows the DCC or a local jurisdiction to seize specified property where unlicensed commercial cannabis activity is being conducted and vehicles used to conduct unlicensed cannabis activity, as specified. SB 820 is pending before the Senate Appropriations Committee.

AB 1684 (Maienschein, 2023) expands the authorization for local agencies to adopt ordinances providing for the imposition of administrative fines or penalties to include all unlicensed commercial cannabis activity, as specified. AB 1684 is pending before this Committee and is set to be heard on the same day as this bill.

AB 1601 (Alvarez, 2023) authorizes a local jurisdiction to take disciplinary action against a cannabis licensee for illegal business activities by the licensee, or for concealment of illegal business activities, by a licensee, or by an officer, director, owner, or authorized agent acting on behalf of the licensee. AB 1601 is pending before the Assembly Business & Professions Committee.

AB 1448 (Wallis, 2023) nonsubstantively recasts the requirements for civil penalties for unlicensed cannabis activity and requires, in an action brought by a county counsel, city attorney, or city prosecutor, the penalty first be used to reimburse the prosecuting agency for specified costs in bringing the action, with 50% of the remainder, if any, paid to the county or city, as applicable, and the other 50% to be deposited into the General Fund. AB 1448 is pending before the Senate Business, Professions and Economic Development Committee and is set to be heard on July 10; if it passes out of that Committee, it will be heard by this Committee on the same date as this bill.

Prior Legislation:

AB 2728 (Smith, 2022) would have increased the civil penalty for engaging in unlicensed cannabis activity to four times the amount of the license fee, with a specified safe harbor. AB 2728 failed passage in this Committee.

AB 1138 (Blanca Rubio, Ch. 530, Stats. 2021) created a civil enforcement action for aiding and abetting unlicensed cannabis activity, with a civil penalty of up to $30,000 per violation.

AB 287 (Quirk, Ch. 264, Stats. 2021) extended the statute of limitations for an action to recover civil penalties for engaging in unlicensed commercial cannabis activity without a license to three years.

PRIOR VOTES:

Senate Business, Professions and Economic Development Committee (Ayes 11, Noes 0)

Assembly Floor (Ayes 69, Noes 0)

Assembly Judiciary Committee (Ayes 10, Noes 0)

Assembly Business and Professions Committee (Ayes 15, Noes 2)

**************

1. 21 U.S.C. § 812. Drugs designated as Schedule I ostensibly have a high potential for abuse, no currently accepted medical use in treatment in the United States, and a lack of accepted safety for use of the drug or other substance under medical supervision. (Id., § 812(b)(1).) Fentanyl and other opioids, by contrast, are designated as Schedule II. (Id., § 812, Schedule II.) ↑

2. Compassionate Use Act (Prop. 215), as approved by voters, Gen. Elec. (Nov. 5, 1996). ↑

3. The Control, Regulate, and Tax Adult Use of Marijuana Act (Prop. 64), as approved by voters, Gen. Elec. (Nov. 8, 2016). ↑

4. SB 94 (Senate Committee on Budget and Fiscal Review, Ch. 27, Stats. 2017). ↑

5. See, e.g., Orsmeth, Killings, robberies, extortion. California can’t stop its booming illegal cannabis stores, L.A. Times (Sept. 13, 2022), available at https://www.latimes.com/california/story/2022-09-13/illegal-weed-dispensaries-police-raids-crime. All links in this analysis are current as of July 6, 2023. ↑

6. Ibid. ↑

7. E.g., Kenny, Monterey County reveals contamination in illicit marijuana samples, The Mercury News (Dec. 15, 2021). ↑

8. E.g., DCC, Press Release, California’s statewide cannabis enforcement taskforce continues to aggressively combat illegal marijuana by seizing over $52 million worth of unlicensed cannabis products (May 22, 2023), https://cannabis.ca.gov/2023/05/californias-statewide-cannabis-enforcement-taskforce-continues-to-aggressively-combat-illegal-market-by-seizing-over-52m-worth-of-unlicensed-cannabis-products-in-q1-2023/. ↑

9. See AB 195 (Assembly Committee on Budget, Ch. 56, Stats. 2022); SB 1138 (Blanca Rubio, Ch. 530, Stats. 2021); AB 141 (Assembly Committee on Budget, Ch. 70, Stats. 2021). ↑

SENATE COMMITTEE ON

BUSINESS, PROFESSIONS AND ECONOMIC DEVELOPMENT

Senator Richard Roth, Chair

2023 - 2024 Regular

Bill No: AB 1171 Hearing Date: July 3, 2023

Subject: Cannabis: private right of action.

SUMMARY:

Authorizes a licensee under the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) to bring a civil action in superior court against a person engaging in commercial cannabis activities without a license, as specified.

NOTE:

Double-referral to the Senate Committee on Judiciary, second.

Existing law:

1. Establishes the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) to regulate the cultivation, distribution, transport, storage, manufacturing, processing, and sale of both medicinal cannabis and adult-use cannabis. (Business and Professions Code (BPC) § 26000)
   
2. Establishes the Department of Cannabis Control (DCC) to administer and regulate provisions of MAUCRSA. (BPC § 26010)
   
3. Prohibits a person from engaging in commercial cannabis activity without a state license issued by the DCC, as specified. (BPC § 26037.5)
   
4. Requires the DCC to make and prescribe reasonable rules and regulations as may be necessary to implement, administer, and enforce its duties, which must be consistent with the purpose and intent of the Control, Regulate and Tax Adult Use of Marijuana Act. (BPC § 26013)
   
5. States that nothing under the DCC’s enforcement authority is to be interpreted to supersede or limit state agencies from exercising their existing enforcement authority, including but not limited to, under the Fish and Game Code, the Food and Agriculture Code, the Health and Safety Code, the Public Resources Code, the Water Code, or the application of those laws. (BPC § 26036)
   
6. Subjects a person engaging in commercial cannabis activity without a required licensed under MAUCRSA to civil penalties of up to three times the amount of the license fee for each violation, and each day constitutes a new violation. (BPC § 26038(a)(1))
   
7. Subjects a person who has management or control of a commercial property, or a commercial building, room, space, or enclosure either as an owner, lessee, agent, employee or mortgagee who knowingly rents, leases, or makes available for use, with or without compensation, the commercial property, commercial building, room, space, or enclosure for the purpose of the unlicensed commercial cannabis cultivation, manufacture, storage, sale or distribution of cannabis to a civil penalty of up to $10,000 for each violation, and each day constitutes a new violation. (BPC § 26038(a)(3))
   
8. Specifies who is to be reimbursed when collecting civil penalties associated with the investigation and to which fund the monies are to be deposited based on who brought forth the action, as specified. (BPC § 26038(c)(e))
   
9. Authorizes a peace officer, including a peace officer with the DCC, to seize cannabis products in any of the following circumstances, The cannabis or cannabis product is subject to recall or embargo by the DCC, subject to destruction, or is seized related to an investigation or disciplinary action. (BPC § 26039.4)
   
10. Authorizes the superior court for the county in which any person has engaged or is about to engage in any act which constitutes a violation of MAUCRSA to, upon a petition filed by the DCC, issue an injunction or other appropriate order restraining the conduct. (BPC § 26031.2(a))

This bill:

1. Provides that in addition to other remedies permitted by law, a licensee under MAUCRSA may bring an action in superior court against a person engaging in commercial cannabis activity without a required license.
   
2. Requires a licensee to demonstrate actual harm resulting from the unlicensed commercial cannabis activity in order to prevail in an action brought pursuant to 1) above.
   
3. Authorizes a court to enter an order enjoining the defendant from engaging in commercial cannabis activity without a license in an action pursuant to 1) above.
   
4. Makes a licensee who prevails in an action pursuant to 1) above entitled to the following:
   
5. Actual damages caused by the unlicensed commercial cannabis activity;
   
6. Statutory damages not to exceed $500,000;
   
7. Reasonable attorney’s fees and costs.
   
8. Requires the court, in assessing the statutory damages, to consider all of the following:
   
9. The amount of money derived by the person engaging in commercial cannabis activity;
   
10. The number of licensed operations impacted by the unlawful conduct;
    
11. The number of prior violations of state or local cannabis licensing laws the person committed; and,
    
12. Any other factor the court deems to be within the interest of justice.

FISCAL EFFECT:

This bill is not keyed fiscal by Legislative Counsel.

COMMENTS:

1. Purpose. The UFCW Western States, San Diego/Imperial Counties Joint Labor Management Cannabis Committee is the sponsor of this bill. According to the Author, “While there are many reasons for the failure of California cannabis, there is ample evidence that competition from the illicit market is playing a primary role. An estimated 4 out of every 5 cannabis purchases in California are made in the illicit market today…This trend is getting worse, not better. Legal cannabis sales have been in decline for 22 months. In May 2022, there were close to 1,500 cannabis brands in the California cannabis market. Less than a year later, approximately 1,000 remain…The devastating impact of this illicit competition is seen in the form of dramatically decreased tax revenue. Between Q2 2021 and Q4 2022, the CDTFA reports that Cannabis Excise Tax Revenue has dropped by 40%.”

The Author states that “There is no sign that that downward trajectory is slowing. According to Headset, a real-time industry data-tracking company, legal cannabis sales have been in decline for 22 months. In May 2022, there were close to 1,500 brands in the market. Less than a year only about 1,000 remain. Some of the largest multi-state operators have exited the California market, characterizing operating conditions as “brutal” and the investment climate as “toxic. Industry stakeholders have long exhorted the Department of Cannabis Control to prioritize enforcement against unlicensed businesses, imposing the financial penalties permitted for in § 260312.5. We’ve seen little action as the state relies on local law enforcement to initiate action and the latter lacks funding.”

1. Background.

Cannabis Regulatory Background. In 1996, California first legalized medicinal cannabis via Proposition 215, also known as the Compassionate Use Act. Proposition 215 protected qualified patients and primary caregivers from prosecution related to the possession and cultivation of cannabis for medicinal purposes. In 2003, the Legislature authorized the formation of medical marijuana cooperatives—nonprofit organizations that cultivate and distribute marijuana for medical uses to their members through dispensaries.

In 2015, Governor Brown signed three bills into law that created a comprehensive state licensing and regulatory framework governing the commercial cultivation, manufacture, retail sale, transport, distribution, delivery, and testing of medical cannabis in California. AB 243 (Wood, Chapter 688, Statutes of 2015), AB 266 (Bonta, Chapter 689, Statutes of 2015), and SB 643 (McGuire, Chapter 719, Statutes of 2015) collectively established the Medical Marijuana Regulation and Safety Act (later renamed to the Medical Cannabis Regulation and Safety Act (MCRSA)), to be administered by a number of state agencies: a Bureau of Cannabis Control (BCC) within the Department of Consumer Affairs (DCA); the California Department of Public Health (CDPH); and the California Department of Food and Agriculture (CDFA).

Shortly following the passage of MCRSA, in November 2016, California voters passed Proposition 64, the “Control, Regulate and Tax Adult Use of Marijuana Act” (Prop 64), which decriminalized and legalized adult-use cannabis. Less than a year later in June 2017, the California State Legislature passed a budget trailer bill, SB 94 (Committee on Budget and Fiscal Review, Chapter 27, Statutes of 2017), that integrated MCRSA with Prop 64 to create the Medical and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), the current regulatory structure for both medicinal and adult-use cannabis.

Beginning in 2018, Prop 64 permitted adults 21 years of age or older to legally grow, possess, and use cannabis for nonmedical purposes, with certain restrictions. Additionally, in 2018, because of Prop 64 and as codified in MAUCRSA, the state implemented a cannabis cultivation and excise tax, which imposes a weight-based tax on production of cannabis and a 15% tax on those who purchase cannabis or cannabis products that are sold in the state.

In 2021, DCC was formally established with both licensing, regulatory and enforcement authority. DCC was designed to centralize and align critical licensing, compliance and enforcement responsibilities to help build a sustainable and successful legal cannabis market by creating a single point of contact for cannabis applicant, licensees and local governments. The goal was to ultimately simplify and centralize state regulatory efforts; improve coordination, including enforcement; reduce barriers to participation in the legal market; and incentivize greater local participation.

Licensure Requirements. Under current law, a cannabis license is required for every corner of the cannabis market, including growing cannabis, transporting cannabis, making cannabis products, testing cannabis products, selling cannabis, and holding an event where cannabis is sold. Each license type is distinct and must be approved before operating.

The illicit cannabis market and those operating without local or state oversight do not abide by any of California’s current state licensing requirements and do not remit the proper payments into the Cannabis Tax Fund, which is designated for the collection of state cannabis excise tax. Monies from the fund are dedicated to regulatory and administrative costs, reimbursing certain state agencies for reasonable costs associated with implementing, administering, and enforcing MAUCRSA. Monies additionally support academic research grants, including researching the efficacy of medicinal cannabis and the impacts of legalization. Monies are set aside for youth education, prevention, early intervention, and treatment; environmental protection; and public safety-related activities.

BPC § 26038 details penalties for unlicensed commercial cannabis activity. A person engaging in commercial cannabis without a license is subject to civil penalties. Further, the DCC is permitted to destroy cannabis seized as part of a violation of operating without a license and the DCC can seek reimbursement for the costs of the enforcement process. It is currently illegal to grow, distribute, sell, deliver, transport, and make cannabis products etc., without obtaining the appropriate state or local license and authorization.

Current law specifies the current parameters for assessing civil penalties, which are sought in court. Under current law, an action for civil penalties can be brought by the DCC, the Attorney General, or local public attorneys. There are individual penalties of up to three times the amount of the required license fee for each violation, and each day constitutes a separate violation. There are also civil penalties of up to $30,000 per day of operation for aiding and abetting unlicensed cannabis activity, which means a person encouraged, aided, or facilitated the activity. There are also civil penalties of up to $10,000 per day for a person who provides property, including providing the space, enclosures, rents, etc. for the purpose of unlicensed commercial activity.

Under current law, the civil penalties assed are collected by either the DCC, the AG or a local city attorney and divided amongst administrative costs to the prosecuting agency with the balance deposited into the General Fund.

As part of the State’s efforts to address challenges associated with the increasing illicit market, the State has taken a number of actions to increase and expand its efforts to address the underground market. In late 2022, Governor Newsom established the “Unified Cannabis Enforcement Taskforce” (UCTE) which co-chaired by the DCC and the California Department of Fish and Wildlife and is being coordinated by the California Governor’s Office of Emergency Services (Cal OES) through its Homeland Security Division. The taskforce has been charged by the Governor to better align state efforts and increase enforcement coordination between state, local and federal partners.

Also in the enforcement space, the California Department of Justice established the EPIC Program, which focuses on the investigation and prosecution of civil and criminal cases relating to illicit cannabis cultivation with a focus on environmental and economic harms and labor exploitation. Beginning in 2022, EPIC transitioned DOJ’s 30-year seasonal eradication program into a year-round task force. EPIC is a multi-agency collaboration led by DOJ in partnership with the U.S. Department of Agriculture’s U.S. Forest Service; the U.S. Department of the Interior's Bureau of Land Management and National Park Service; the California Department of Fish and Wildlife; the U.S. Department of Justice’s Drug Enforcement Administration; the California National Guard, Counter Drug Task Force; the Central Valley High Intensity Drug Trafficking Areas program; California State Parks; and other local law enforcement departments.

The California Department of Tax and Fee Administration (CDTFA) reported in 2022 that it was selling commercial properties seized in connection with illegal cannabis operations to recover unpaid taxes.

On March 2, 2023, the DCC released its enforcement statistics from 2021 and 2022. DCC reported, “DCC-led search warrant operations increased from 62 in 2021 to 155 in 2022, a 150 percent increase. DCC also seized over 41,726 pounds of illegal cannabis in 2021 and more than 144,254 pounds in 2022, a 246 percent increase. Arrests more than tripled, with 17 in 2021 and 56 in 2022. And DCC led operations that seized $243,017,836 worth of cannabis last year, a 212 percent increase from the $77,772,936 seized in 2021.” It is currently unknown how many civil penalties the board has assessed of unlicensed individuals and how much has been collected.

In addition to the DCC’s enforcement statistics, the DCC provides the following press update with respect to the actions of the UCTE, which noted: “Building upon the $32 million seized by the Unified Cannabis Enforcement Taskforce (UCETF) during the first quarter of their operation, the taskforce announced today that it seized over $52 million in unlicensed cannabis and cannabis products in Q1 2023. Additional highlights from the period January 1, 2023, through March 30, 2023, include a 43 percent gain in the number of plants eradicated. By targeting larger cultivation operations, UCETF was able to improve its quarter-over-quarter results despite serving 30 percent fewer search warrants.” Further, it noted “[a]s the DCC Law Enforcement Division focuses on illegal indoor cultivations, unlicensed dispensaries, and unlicensed manufacturing and distribution operations, the multi-agency, cross-jurisdictional approach of UCETF allows us to leverage the expertise of each participating department to disrupt a broader scope of illegal businesses,” stated Bill Jones, Chief of the Law Enforcement Division for DCC. “Significantly improving our results speaks to our effectiveness and will help support the legal cannabis market. This multiagency task force has hit the ground running, allowing partners with the opportunity to contribute to their area of expertise. UCETF has quickly made an impact on the illegal cannabis supply chain, which in turn is helping the regulated market succeed,” said David Bess, Chief of Enforcement for California Department of Fish & Wildlife. “The gains and successes made by the task force speak directly to the efficiency and dedication of this multiagency collaboration and we expect to see this type of continued success throughout the year as UCEFT moves into outdoor cultivation enforcement season.”

To date UCETF has seized $84,652,875 in unlicensed cannabis through the serving of 51 search warrants. The taskforce has also eradicated 82,216 plants and seized 13 firearms.”

This bill expressly authorizes a licensee to bring a civil action in superior court against a person engaging in commercial cannabis activity without a license. This bill proposes a unique new way to address the illicit cannabis market in California. In order to prevail in a case, a licensee would need to demonstrate “actual harm” incurred by the unlicensed activity.

Private Right of Action. A private right of action allows a private person or persons to enforce their rights under a particular statute. Private rights of action can be express or implied. Express rights explicitly outline in statute how a person or persons can enforce their rights in court, and against whom. Implied rights are rights that a statute may contain, or are assumed to contain, usually based on a previous judicial opinion outlining and confirming the existing right. The question as to whether a private right of action should exist in a statute is a common one in the Legislature, where proponents often argue explicitly providing these statutory rights expands access to justice for private citizens, and opponents are concerned about creating unnecessary lawsuits that will backlog courts and create additional, unnecessary expenses for individuals or business owners.

1. Related Legislation. SB 820 (Alvarado Gil of 2023) authorizes the DCC or any local jurisdiction to seize specified property where unlicensed commercial cannabis activity is conducted and any vehicles used to conceal or transport cannabis products for a person engaging in unlicensed activities, establishes related notice requirements, and provides for forfeiture proceedings, as specified. (Status: This bill was held under submission in the Senate Committee on Appropriations)

AB 1684 (Maienschein) of 2023 would expand the authorization for an ordinance providing for the immediate imposition of administrative fines or penalties to include all unlicensed commercial cannabis activity, including cultivation, manufacturing, processing, distribution, or retail sale and would authorize the ordinance to declare unlicensed commercial cannabis activity a public nuisance. The bill would prohibit the ordinance from imposing an administrative fine or penalty exceeding $1,000 per violation or $10,000 per day. The bill would authorize the ordinance to impose the administrative fine or penalty on the property owner and each owner of the occupant business entity and to hold them jointly and severally liable. The bill would authorize a local agency that adopts an ordinance authorized by this provision to refer a case involving unlawful commercial cannabis activity to the Attorney General, as specified. (Status: This bill is currently pending in Senate Committee on Judiciary)

AB 1616 (Lackey) of 2023 authorizes the Board of State and Community Corrections (BSCC) to award grants to local governments that were previously ineligible and requires BSCC to prioritize local governments whose programs seek to combat the illicit cannabis market. (Status: This bill is currently pending in this Committee)

AB 1448 (Wallis) of 2023 would authorize a local jurisdiction to establish administrative penalties for violations of local law relating to commercial cannabis activity, including a special lien. The bill would also authorize a local jurisdiction that has established procedures for collecting those administrative penalties to additionally collect specified civil penalties as administrative penalties. In addition, the bill would redirect specified portions of civil penalties collected for unlicensed commercial cannabis activity from the General Fund to the treasurers of the localities that brought the action for the penalties. (Status: This bill is currently pending in this Committee)

AB 2087 (Petrie-Norris) of 2022, which was held on suspense in the Assembly Appropriations Committee, would have established a private right of action for those who received unlicensed dispensing or furnishing of prescription drug services. (Status: This bill was held in the Assembly Committee on Appropriations)

AB 1138 (Blanca Rubio, Chapter 530, Statutes of 2021) provides an additional enforcement mechanism against unlicensed cannabis activities. This bill establishes a civil penalty for high-level control persons who knowingly aid and abet unlicensed cannabis activities, as defined, of up to $30,000 per violation, with each day of unlicensed cannabis activity constituting a separate violation. The civil penalty may be sought by city attorneys and prosecutors, and county attorneys, in jurisdictions of 750,000, in addition to the Attorney General.

1. Arguments in Support. San Diego/Imperial Counties Joint Labor Management Cannabis Committee writes in support and notes, “Unfortunately, state and local enforcement has been unable to keep up with the growing illicit market. In short, more needs to be done to clamp down on entities illegally selling intoxicating cannabis and cannabis-like products outside of the regulated framework.”

The California Cannabis Industry Association writes in support and notes, “While local and state agencies responsible for cannabis enforcement continue to be insufficiently resourced to meet the challenge of California's enormous illegal cannabis industry, AB 1171 provides an additional tool to help combat the illicit market.”

The United Food and Commercial Workers Western States Council, writes in echoes comments from the San Diego/Imperial Counties Joint Labor Management Cannabis Committee and adds that “AB 1171 will empower licensed operators to seek judicial relief against their illegal competitors by giving them standing in Superior Court to seek a permanent injunction against unlicensed operators.”

1. Suggested Amendments to Address Issues. In order to further clarify the authority for a licensee to take action against an unlicensed person engaging in commercial cannabis and in order to narrow the scope of this authority to ensure that this bill does not result in over ambitious litigation and does not authorize unnecessarily steep statutory damages, the bill should be amended according to the following.

Strike the current contents of the bill and insert the following:

SECTION 1. Section 26038.1 is added to the Business and Professions Code, to read:

26038.1. (a) In addition to other remedies permitted by law, a licensee under this division may bring an action in superior court against a person engaging in commercial cannabis activity without a license as required in Section 26053.

(b) In order to prevail in an action brought pursuant to subdivision (a), a licensee shall demonstrate actual harm resulting from the unlicensed commercial cannabis activity.

(c) In an action pursuant to subdivision (a), the court may enter an order enjoining the defendant from engaging in commercial cannabis activity without a license as required by this division.(d) A licensee that prevails in an action brought pursuant to subdivision (a) shall be entitled to the following:

(1) Either actual damages caused by the unlicensed commercial cannabis activity or statutory damages in the amount of $75,000, at the election of the prevailing licensee.

(2) Reasonable attorney’s fees and costs.

(e) This section shall not apply to any Labor Code violations committed by a person engaging in unlicensed cannabis activity and shall not form the basis for a cause of action under the Labor Code Private Attorneys General Act of 2004 (Sections 2698-2699.8 the Labor Code).

SEC. 2. The Legislature finds and declares that this act furthers the purposes and intent of the Control, Regulate and Tax Adult Use of Marijuana Act.

SUPPORT AND OPPOSITION:

Support:

San Diego/Imperial Counties Joint Labor Management Cannabis Committee

California Cannabis Industry Association
County of Santa Barbara
United Food and Commercial Workers, Western States Council

Opposition:

None received

-- END --

ASSEMBLY THIRD READING

ATR Bill Id:AB 1171

Author:(Blanca Rubio)

As Amended Ver:March 23, 2023

2/3 vote

SUMMARY

Authorizes a person licensed under the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) to bring an action in superior court against a person engaging in commercial cannabis activity without a license, as specified.

Major Provisions

1. Authorizes, in addition to other remedies permitted by law, a commercial cannabis licensee to bring an action in superior court against a person engaging in commercial cannabis activity without a license.
2. Requires a licensee to demonstrate actual harm resulting from the unlicensed activity.
3. Authorizes the court to, in an action brought under the provisions of this bill, enter an order enjoining the defendant from engaging in commercial cannabis activity without a license.
4. Entitles a prevailing licensee to the following:
   1. Actual damages caused by the unlicensed commercial cannabis activity.
   2. Statutory damages not to exceed $500,000.
   3. Reasonable attorney's fees and costs.
5. Requires the court to consider the following when assessing statutory damages:
   1. The amount of money the person derived from the unlicensed commercial cannabis activity.
   2. The number of licensed operations impacted by the unlawful conduct.
   3. The number of prior violations of cannabis licensing laws the person committed.
   4. Any other factor the court deems to be within the interest of justice.

COMMENTS

Background. The Medicinal and Adult Use Cannabis Regulation and Safety Act (MAUCRSA), which incorporates prior cannabis laws, authorizes a person who obtains a state license under MAUCRSA to engage in commercial adult-use cannabis activity under that license and applicable local ordinances. It is unlawful to operate a cannabis business without a license.

The Department of Cannabis Control (DCC) is the California state agency that licenses and regulates cannabis businesses. DCC regulates the:

1. Growing of cannabis plants.
2. Manufacture of cannabis products.
3. Transportation and tracking of cannabis goods throughout the state.
4. Sale of cannabis goods.
5. Events where cannabis is sold or used.
6. Labeling of goods sold at retail.

Unlicensed Market. As noted during the February 25, 2020, joint informational hearing between this Committee and the Assembly Budget Subcommittee No. 4 on State Administration, there have been significant concerns over cannabis operations that continue to do business outside of the regulatory scheme. They can avoid taxes and compete with lawful businesses. They also create the potential for consumer and environmental harm, avoiding testing and agricultural requirements.

Normally, licensing agencies regulate problematic licensed and unlicensed activity by imposing administrative penalties against an existing license, the strongest of which is revocation of the license, or by withholding the issuance of a license until any problems or deficiencies are addressed. The difficulty in regulating unlicensed businesses that do not plan to obtain a license, including unlicensed cannabis businesses, is that there is no incentive to comply with the administrative penalties because the license is irrelevant to them.

As a result, MAUCRSA authorizes the DCC, after the exhaustion of the administrative and judicial review procedures, to apply to the superior court for a judgment in the amount of any administrative fines and an order compelling the cited person to comply with the DCC order. A violation of a court order is a misdemeanor.

It also establishes various civil penalties which are sought in court and are not tied to the licensing process, which can be brought by the DCC, the Attorney General, or local public attorneys. There are individual penalties of up to three times the amount of the required license fee (which vary based on gross annual revenue, up to $300,000 for a microbusiness with gross annual revenue of $80 million). There are also civil penalties of up to $30,000 per day of operation for aiding and abetting unlicensed cannabis activity, which means a person encouraged, aided, or facilitated the activity.

Additionally, it is punishable by up to one year in county jail, which increases per violation, for someone who has management or control of a property (including an employee who works at the property) that knowingly makes the property available for the unlawful manufacturing, storing, or distributing a controlled substance for sale or distribution, including cannabis.

This bill would establish a new private right of action, allowing individual licensees to sue an unlicensed cannabis operation. It would require the licensees to prove actual damages from the unlicensed activity, and authorize a court to issue an injunction prohibiting the unlicensed activity. It would entitle the prevailing plaintiff to the amount of the actual damages, as well as statutory damages of up to $500,000 dollars.

According to the Author

"[This bill] seeks to empower legal and fully licensed cannabis operators to petition the court to issue an injunction against non-licensed operators. This additional enforcement tool is essential given that the local and state agencies responsible for cannabis enforcement are insufficiently resourced to meet the challenge of California's enormous and rapidly growing illegal cannabis industry."

Arguments in Support

The San Diego & Imperial Counties Joint Labor Management Cannabis Committee (JLM) (sponsor) writes in support:

The JLM is a joint venture between UFCW Local 135, which represents over 13,000 unionized employees, and March and Ash, a community-oriented chain of cannabis dispensaries in Southern California…. Five years after the passage of the Adult Use of Marijuana Act (AUMA, Proposition 64 2018), we now find the legal market at risk, including its high-road employers, community entrepreneurs, and contribution to California's vibrant economy.

Today, good operators in the licensed cannabis industry are under siege on three fronts. They are losing substantial market share to illegal cannabis operators, to licensed cannabis operators operating outside the regulated market, and to companies selling high-potency synthetic THC-like products under the guise of hemp.

Unfortunately, state and local enforcement has been unable to keep up with the growing illicit market. In short, more needs to be done to clamp down on entities illegally selling intoxicating cannabis and cannabis-like products outside of the regulated framework. [This bill] will empower licensed operators to seek judicial relief against their illegal competitors by giving them standing in Superior Court to seek a permanent injunction against unlicensed operators

The devastating impact of this illicit competition is seen in the form of dramatically decreased tax revenue. Between Q2 2021 and Q4 2022, the CDTFA reports that Cannabis Excise Tax Revenue has dropped by 40% (https://www.cdtfa.ca.gov/dataportal/dataset.htm?url=CannabisTaxRevenues).

There is no sign that that download trajectory is slowing. According to Headset, a real-time industry data-tracking company, legal cannabis sales have been in decline for 22 months. In May 2022, there were close to 1,500 brands in the market. Less than a year later, only about 1,000 remain. Some of the largest multi-state operators have exited the California market, characterizing operating conditions as "brutal" and the investment climate as "toxic."

The persistence of the illicit cannabis market continues to put workers' lives at risk, degrade our natural resources, endanger community safety, and undermine the stability of the state's cannabis tax revenue.

We must do more to enforce existing law, to complement our ongoing support for the legal cannabis market.

Arguments in Opposition

None on file

FISCAL COMMENTS

Unknown. This bill is keyed non-fiscal by the Legislative Counsel.

VOTES

ASM BUSINESS AND PROFESSIONS: 15-2-1

YES: Berman, Alanis, Alvarez, Bonta, Chen, Gipson, Grayson, Irwin, Jackson, Lee, Lowenthal, McCarty, McKinnor, Stephanie Nguyen, Ting

NO: Dixon, Joe Patterson

ABS, ABST OR NV: Flora

ASM JUDICIARY: 10-0-1

YES: Maienschein, Essayli, Connolly, Haney, Kalra, Pacheco, Papan, Reyes, Robert Rivas, Sanchez

ABS, ABST OR NV: Dixon

UPDATED

VERSION: March 23, 2023

CONSULTANT: Vincent Chee / B. & P. / (916) 319-3301 FN: 0000296

Date of Hearing: May 2, 2023

ASSEMBLY COMMITTEE ON JUDICIARY

Brian Maienschein, Chair

ABPCA Bill Id:AB 1171

Author:(Blanca Rubio) – As Amended Ver:March 23, 2023

As Proposed to be Amended

SUBJECT: Cannabis: private right of action

KEY ISSUES:

1. Should licensed cannabis businessES be able to seek injunctive relief against an unlicensed operator?
2. Should licensed cannabis businesses be able to seek damages for actual harm resulting from unlicensed operations?

SYNOPSIS

Although it has been nearly seven years since California voters approved Proposition 64 and legalized recreational cannabis use in this state, an illicit market for cannabis products continues to flourish in California. Unlawful cannabis operators have economic advantages over their licensed counterparts as unlicensed operators can avoid the costs of complying with state regulations, paying taxes, and properly testing products. In order for California’s burgeoning legal cannabis market to grow, it is imperative that the state strengthen and better enforce the laws prohibiting unlicensed cannabis activity. In furtherance of this goal, in recent years, this Committee has approved several measures to strengthen civil enforcement of cannabis laws. However, due to a lack of state-level enforcement resources, these tools have been underutilized, and the legal cannabis industry continues to struggle in the face of unlawful competition.

Recognizing that the state’s current budget situation is unlikely to produce significant new investment in enforcement resources, this bill seeks to empower legal cannabis operations to enforce the law on their own. The bill would authorize a legal cannabis business that is harmed by an unlawful operator to file a civil suit to enjoin the unlawful conduct. Additionally, this bill would enable a lawful cannabis business to recover its actual damages from the unlawful operator as well as statutory damages.

This measure is supported by the United Food and Commercial Workers Western States Council who note that unlawful cannabis operations undercut the legal businesses at which their members work. They note the need for greater enforcement and highlight the efficiency of letting legal cannabis businesses fend for themselves. This measure has no known opposition. This bill was previously heard and approved by the Committee on Business and Professions by a vote of 15-2.

SUMMARY: Provides licensed cannabis operators the ability to file civil actions against unlicensed operations. Specifically, this bill:

1. Provides that, in addition to other remedies permitted by law, a cannabis business licensee may bring an action in superior court against a person engaging in commercial cannabis activity without a license, as specified.
2. Requires that in order to prevail in an action brought pursuant to 1) a licensee must demonstrate actual harm resulting from the person engaging in commercial cannabis activity without a license.
3. Permits a court in an action brought pursuant to 1) to enter an order enjoining the defendant from engaging in commercial cannabis activity without a license.
4. Provides that a licensee who prevails in an action brought pursuant to 1) to recover the following:
   1. Actual damages caused by the unlicensed commercial cannabis activity;
   2. Statutory damages not to exceed $500,000 thousand; and
   3. Reasonable attorney’s fees and costs.
5. Requires a court, in evaluating the statutory damages provided for in 4), to consider the following:
   1. The amount of money derived by a person engaging in commercial cannabis activity without a license;
   2. The number of licensed operations impacted by the unlawful conduct;
   3. The number of prior violations of cannabis licensing laws the person committed; and
   4. Any other factor the court deems to be within the interest of justice.

EXISTING LAW:

1. Enacts the Medicinal and Adult-Use Cannabis Regulation and Safety Act to provide for a comprehensive regulatory framework for the cultivation, distribution, transport, storage, manufacturing, processing, and sale of medicinal and adult-use cannabis. (Business and Professions Code Section 26000 et seq.)
2. Provides for twenty total types of cannabis licenses including subtypes for cultivation, manufacturing, testing, retail, distribution, and microbusiness; requires each licensee except for testing laboratories to clearly designate whether their license is for adult-use or medicinal cannabis. (Business and Professions Code Section 26050.)
3. Establishes the Department of Cannabis Control within the Business, Consumer Services, and Housing Agency, for purposes of regulating the cannabis industry in California. (Business and Professions Code Section 26010.)
4. Requires the Bureau of Cannabis Control to convene an advisory committee to advise state licensing authorities on the development of standards and regulations for legal cannabis, including best practices and guidelines that protect public health and safety while ensuring a regulated environment for commercial cannabis activity that does not impose such barriers so as to perpetuate, rather than reduce and eliminate, the illicit market for cannabis. (Business and Professions Code Section 26014.)
5. Establishes grounds for disciplinary action against cannabis licensees, including failures to comply with state licensing requirements as well as local laws and ordinances. (Business and Professions Code Section 26030.)
6. Subjects cannabis businesses operating without a license to civil penalties of up to three times the amount of the license fee for each violation in addition to any criminal penalties. (Business and Professions Code Section 26038.)
7. Requires that all advertisements and marketing accurately and legibly identify the licensee responsible for its content, by adding, at a minimum, the licensee’s license number, and prohibits a technology platform from displaying an advertisement by a licensee on an Internet Web page unless the advertisement displays the license number. (Business and Professions Code Section 26151.)
8. Prohibits a licensee from publishing or disseminating advertisements or marketing of cannabis and cannabis products while the licensee’s license is suspended. (Business and Professions Code Section 26152.)
9. Authorizes the Legislature to, by majority vote, enact laws to implement the state’s regulatory scheme for cannabis if those laws are consistent with the purposes and intent of the Control, Regulate and Tax Adult Use of Marijuana Act (Proposition 64). (Business and Professions Code Section 26000.)
10. Provides that state cannabis laws are not to 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. (Business and Professions Code Section 26200.)

FISCAL EFFECT: As currently in print this bill is keyed non-fiscal.

COMMENTS: In the last decade, California has moved to legalize the recreational use of cannabis for adults and set up a system for regulating the legal cannabis industry. Unfortunately, unlicensed cannabis operations still exist throughout the state and are threatening to cripple the legal industry. Although the state has authorized several new tools to combat unlicensed cannabis operations, the problem persists. This measure would provide a new tool to licensed cannabis businesses, letting them take the law into their own hands, and seek injunctive and financial relief from an unlicensed operation that has harmed their legal business. In support of this bill, the author states:

AB 1171 seeks to empower legal and fully licensed cannabis operators to petition the court to issue an injunction against non-licensed operators. This additional enforcement tool is essential given that the local and state agencies responsible for cannabis enforcement are insufficiently resourced to meet the challenge of California’s enormous and rapidly growing illegal cannabis industry.

The long history of legal cannabis in California. The use of cannabis in California was first authorized for medical patients, with a valid prescription from a doctor, with the approval of Proposition 215 known as the Compassionate Use Act. In the early years of the permissible use of medical marijuana, there was little oversight or regulation of the practice. In 2003, the Legislature stepped into the fray and enacted the state’s Medical Marijuana Program by passing aptly numbered SB 420 (Vasconcellos) Chap. 875, Stats. 2003. The Medical Marijuana Program provided for a voluntary medical marijuana patient card, which could be used to verify that the patient or their caregiver had state authorization to cultivate, possess, transport, or use medicinal cannabis. Despite the passage of SB 420, the medical marijuana industry still remained largely unregulated. Clinics began to open whereby doctors could prescribe cannabis for a host of conditions, some of which were considered to be generally innocuous. Further, with the adoption of the medical marijuana cards, forgeries began to proliferate throughout the state. Frustrated with the state-level oversight, many local agencies stepped up enforcement against medical marijuana dispensaries and passed harsh ordinances regulating the medical marijuana industry. The battle between the medical marijuana industry and local governments came to an apex at the California Supreme Court, which held that state law did not expressly or implicitly limit the inherent authority of a local jurisdiction to pass ordinances or enact land use measures to regulate the industry. (Riverside v. Inland Empire Patients (2013) 56 Cal. 4th 729.)

Following the ruling in Inland Empire Patients, the Legislature once again confronted the question of how to regulate the marijuana industry in California. After several attempts, in 2015 the Legislature enacted a comprehensive package of bills to implement the Medical Marijuana Regulation and Safety Act (AB 243 (Wood) Chap. 668, Stats. 2015, AB 266 (Bonta et al.) Chap 669, Stats. 2018, and SB 643 (McGuire) Chap. 719, Stats. 2015). These bills established the Bureau of Cannabis Control within the Department of Affairs and tasked the Bureau, along with the Departments of Public Health and Food and Agriculture, with developing a system for regulating the cultivation, manufacture, transportation, testing, distribution, and sale of medicinal cannabis.

The next year, California voters enacted Proposition 64, the Adult Use of Marijuana Act. That Act built upon the existing regulations developed pursuant to the Medical Marijuana Regulation and Safety Act, and retained the Bureau of Cannabis Control as the primary regulator of cannabis in California. Subsequent to the passage of Proposition 64, the Legislature enacted SB 94 (Committee on Budget and Fiscal Review, Chap. 27, Stats. 2017), which reconciled the differences between the medical marijuana regulatory structure and the adult recreational use regulations. SB 94 vested licensing authority for the various aspects of the cannabis business system with the Bureau of Cannabis Control, the Department of Public Health, and the Department of Food and Agriculture. Additionally, other state agencies, including the Department of the Transportation, the Department of Forestry and Fire Protection, and the State Water Resources Control Board, were tasked with participating in various regulatory processes regarding cannabis in those agencies’ area of jurisdiction. Several of the participating agencies have limited enforcement powers of their own to enforce the state’s cannabis regulations.

Despite the state’s flurry of activity over the past twenty years to permit and regulate cannabis use, the author of this bill, as well as several state regulatory agencies, note that an illicit cannabis industry still exists, undercutting lawful operations and denying the state millions of dollars in taxes each year. In an attempt to improve regulation of the cannabis industry, last year, the Legislature consolidated significant portions of the state regulatory apparatus into the newly created Department of Cannabis Control (AB 141 (Committee on Budget) Chap. 70, Stats. 2021). The Legislature also authorized significant civil penalties, upwards of $30,000 per day, for those engaging in unlicensed cannabis operations. (AB 1138 (B. Rubio) Chap. 530, Stats. 2021.) However, the proponents of this measure note that even with the dramatic new penalty authority, unlicensed activity continues unabated, largely due to a lack of state-level enforcement tools.

This bill. Recognizing that existing enforcement tools are insufficient to handle the scale of unlicensed cannabis operations in the state, this bill seeks to empower licensed operators to help enforce state cannabis laws. The bill would authorize any licensed cannabis operation that suffers actual harm from an unlicensed operation to file a civil action to enjoin the illegal conduct of the unlicensed operator. Additionally, recognizing the perilous financial position many legal cannabis operations are facing as a result of the illegal conduct of others, this bill would enable a licensed cannabis operation to recover the actual damages suffered as a result of competing against an unlicensed operation and statutory damages of up to $500,000, depending on the severity of the unlicensed operation.

Injunctive relief should help lawful businesses stop unlicensed cannabis operations from harming their bottom line. The primary goal of this bill is to stop unlawful conduct from undercutting legal cannabis operations. This unlawful conduct can range from unpermitted marijuana growing operations in more rural areas of the state to unlicensed storefronts in more urban areas. As noted, the existing civil enforcement regime is not deterring nor sufficiently punishing unlawful conduct. This bill would authorize the legal cannabis operators to protect their own interests by seeking a court order to stop the unlicensed conduct.

Proposed amendments require a licensed business to demonstrate actual harm. The bill as currently in print simply permits a licensed cannabis operator to file suit against an unlicensed operator. The bill does not require any demonstration of an actual harm suffered by the legal operator. Somewhat worrisome, this framework may have established a bounty system similar to the State of Texas’s SB 8 for abortion services. Seeking to avoid such an outcome, the author is prudently proposing to amend the measure to adopt an actual harm standard. Accordingly, a new subdivision (b) will be added to the bill to read:

(b) In order to prevail in an action brought pursuant to subdivision (a), a licensee shall be required to demonstrate actual harm resulting from the person engaging in commercial cannabis activity without a license as required by this division.

Proposed amendments enable licensed operators to recoup some of the financial losses attributed to unlicensed cannabis operations. The bill as currently in print contemplated injunctive relief as the primary tool for stopping unlicensed cannabis operations. However, while the bill would provide for attorneys costs and fees, the bill would not make whole a licensed cannabis operator who lost revenue to an unlicensed operation. Seeking to both boost the use of the new injunctive relief and to ensure that licensed operators can recover damages suffered as a result of the illegal operation, the author is proposing to permit a licensed cannabis operator to recover actual damages and statutory damages. Thus, a new subdivisions (d) and (e) will be added to read:

(d) A licensee that prevails in an action brought pursuant to subdivision (a) shall be entitled to the following:

(1) Actual damages caused by the unlicensed commercial cannabis activity.

(2) Statutory damages not to exceed $500,000.

(c) In an action pursuant to subdivision (a), the court shall award a prevailing plaintiff their

(3) Reasonable reasonable attorney’s fees and costs.

(e) In assessing the statutory damages provided by (d) the court shall consider the following:

(1) The amount of money derived by person engaging in commercial cannabis activity without a license.

(2) The number of licensed operations impacted by the unlawful conduct.

(3) The number of prior violations of cannabis licensing laws the person committed.

(4) Any other factor the court deems to be within the interest of justice.

Several technical and conforming amendments will also be made to reflect the above-described changes.

ARGUMENTS IN SUPPORT: This bill is supported by the United Food and Commercial Workers Western States Council. In support of the bill they write:

UFCW represents over 5,000 workers across the cannabis industry in California through bona fide collective bargaining agreements and are working to represent thousands more who work for employers that have signed Labor Peace Agreements with various UFCW locals. One of the biggest challenges for licensed, unionized cannabis employers is the fact that 60 to 70% of cannabis products can be traced to illicit and/or unlicensed operators.

Unfortunately, state and local enforcement has been unable to keep up with the growing illicit market. In short, more needs to be done to clamp down on the so-called black market. AB 1171 will empower licensed operators to seek judicial relief against their illegal competitors by giving them standing in Superior Court to seek a permanent injunction against unlicensed operators

REGISTERED SUPPORT / OPPOSITION:

Support

San Diego/Imperial Counties Joint Labor Management Cannabis Committee

United Food and Commercial Workers Western States Council

Opposition

None on file

Analysis Prepared by: Nicholas Liedtke / JUD. / (916) 319-2334

Date of Hearing: April 11, 2023

ASSEMBLY COMMITTEE ON BUSINESS AND PROFESSIONS

Marc Berman, Chair

ABPCA Bill Id:AB 1171

Author:(Blanca Rubio) – As Amended Ver:March 23, 2023

NOTE: This bill is double referred and if passed by this Committee will be re-referred to the Assembly Judiciary Committee.

SUBJECT: Cannabis: private right of action.

SUMMARY: Authorizes a person licensed under the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) to bring an action in superior court against a person engaging in commercial cannabis activity without a license seeking to enjoin the unlicensed practice.

EXISTING LAW:

1. Regulates controlled substances under the California Uniform Controlled Substances Act. (Health and Safety Code (HSC) §§ 11000-11651)
2. Defines “Cannabis” as all parts of the plant Cannabis sativa L., whether growing or not; its seeds; the resin extracted from any part of the plant; and every compound, manufacture, salt, derivative, mixture, or preparation of the plant, its seeds or resin. (HSC § 11018)
3. Lists cannabis as a Schedule I controlled substance. (HSC §§ 11054(d)(13), 11054(d)(20))
4. Regulates the cultivation, distribution, transport, storage, manufacturing, processing, and sale of medicinal and adult-use cannabis under MAUCRSA and establishes the Department of Cannabis Control (DCC) to administer and enforce the act. (Business and Professions Code (BPC) §§ 26000-26260)
5. Establishes 20 types of cannabis licenses, including subtypes, for cultivation, manufacturing, testing, retail, distribution, and microbusiness and requires each licensee except for testing laboratories to clearly designate whether their license is for adult-use or medicinal cannabis. (BPC § 26050)
6. Prohibits a person or entity from engaging in commercial cannabis activity without a state license issued by the DCC. (BPC § 26037.5)
7. Authorizes the DCC to issue a citation to an unlicensed person for any act or omission that violates any provision of MAUCRSA or related regulations, which may include an order of abatement or an administrative fine not to exceed $30,000 per violation, and specifies that each day of violation constitutes a separate violation. (BPC § 26031.5)
8. Authorizes the DCC, after the exhaustion of administrative and judicial review procedures, to apply to the appropriate superior court for a judgment in the amount of the administrative fine and an order compelling the cited person to comply with the order. (BPC § 26031.5(d))
9. Authorizes the superior court for the county in which any person has engaged or is about to engage in any act which constitutes a violation of MAUCRSA to, upon a petition filed by the DCC, issue an injunction or other appropriate order restraining the conduct. (BPC § 26031.2(a))
10. Defines an injunction as a writ or order requiring a person to refrain from a particular act that when granted by a judge may be enforced as an order of the court. (Code of Civil Procedure (CCP) § 525)
11. Specifies that an injunction may be granted in the following cases:
    1. When it appears by the complaint that the plaintiff is entitled to the relief demanded, and the relief consists in restraining the commission or continuance of the act complained of, either for a limited period or perpetually. (CCP § 526(a)(1))
    2. When it appears by the complaint or affidavits that the commission of some act during the litigation would produce waste, or great or irreparable injury, to a party to the action. (CCP § 526(a)(1))
    3. When it appears, during the litigation, that a party to the action is doing, or threatens, or is about to do, or is procuring or suffering to be done, some act in violation of the rights of another party to the act respecting the subject of the action, and tending to render the judgment ineffectual. (CCP § 526(a)(3))
    4. When pecuniary compensation would not afford adequate relief. (CCP § 526(a)(4))
    5. Where it would be extremely difficult to ascertain the amount of compensation that would afford adequate relief. (CCP § 526(a)(5))
    6. Where the restraint is necessary to prevent a multiplicity of judicial proceedings. (CCP § 526(a)(6))
    7. Where the obligation arises from a trust. (CCP § 526(a)(7))
12. Specifies that a person guilty of willful disobedience of the terms of a process or court order or out-of-state court order is guilty of a misdemeanor. (Penal Code § 166(a)(4)).

THIS BILL:

1. Authorizes, in addition to other remedies permitted by law, a commercial cannabis licensee to bring an action in superior court against a person engaging in commercial cannabis activity without a license.
2. Authorizes the court to, in an action brought under the provisions of this bill, enter an order enjoining the defendant from engaging in commercial cannabis activity without a license.
3. Requires the court to, in an action brought under the provisions of this bill, award a prevailing plaintiff their reasonable attorney’s fees and costs.

FISCAL EFFECT: Unknown. This bill is keyed non-fiscal by the Legislative Counsel.

COMMENTS:

Purpose. This bill is sponsored by the San Diego & Imperial Counties Joint Labor Management Cannabis Committee. According to the author, “[This bill] seeks to empower legal and fully licensed cannabis operators to petition the court to issue an injunction against non-licensed operators. This additional enforcement tool is essential given that the local and state agencies responsible for cannabis enforcement are insufficiently resourced to meet the challenge of California’s enormous and rapidly growing illegal cannabis industry.”

Background. The Medicinal and Adult Use Cannabis Regulation and Safety Act (MAUCRSA), which incorporates prior cannabis laws, authorizes a person who obtains a state license under MAUCRSA to engage in commercial adult-use cannabis activity under that license and applicable local ordinances. It is unlawful to operate a cannabis business without a license.

The Department of Cannabis Control (DCC) is the California state agency that licenses and regulates cannabis businesses. DCC regulates the:

• Growing of cannabis plants.
• Manufacture of cannabis products.
• Transportation and tracking of cannabis goods throughout the state.
• Sale of cannabis goods.
• Events where cannabis is sold or used.
• Labeling of goods sold at retail.

Unlicensed Market. As noted during the February 25, 2020, joint informational hearing between this Committee and the Assembly Budget Subcommittee No. 4 on State Administration, there have been significant concerns over cannabis operations that continue to do business outside of the regulatory scheme. They can avoid taxes and compete with lawful businesses. They also create the potential for consumer and environmental harm, avoiding testing and agricultural requirements.

Normally, licensing agencies regulate problematic licensed and unlicensed activity by imposing administrative penalties against an existing license, the strongest of which is revocation of the license, or by withholding the issuance of a license until any problems or deficiencies are addressed. The difficulty in regulating unlicensed businesses that do not plan to obtain a license, including unlicensed cannabis businesses, is that there is no incentive to comply with the administrative penalties because the license is irrelevant to them.

As a result, MAUCRSA authorizes the DCC, after the exhaustion of the administrative and judicial review procedures, to apply to the superior court for a judgment in the amount of any administrative fines and an order compelling the cited person to comply with the DCC order. A violation of a court order is a misdemeanor.

It also establishes various civil penalties which are sought in court and are not tied to the licensing process, which can be brought by the DCC, the Attorney General, or local public attorneys. There are individual penalties of up to three times the amount of the required license fee (which vary based on gross annual revenue, up to $300,000 for a microbusiness with gross annual revenue of $80,000,000). There are also civil penalties of up to $30,000 per day of operation for aiding and abetting unlicensed cannabis activity, which means a person encouraged, aided, or facilitated the activity.

Additionally, it is punishable by up to one year in county jail, which increases per violation, for someone who has management or control of a property (including an employee who works at the property) that knowingly makes the property available for the unlawful manufacturing, storing, or distributing a controlled substance for sale or distribution, including cannabis.

This bill would establish a new private right of action, allowing individual licensees to sue an unlicensed cannabis operation and authorize a court to issue an injunction prohibiting the unlicensed activity. It would also grant the licensee attorney’s fees if the lawsuit is successful.

Current Related Legislation. AB 1448 (Wallis), which is pending in this committee, would authorize a local jurisdiction to establish administrative penalties for violations of local law relating to commercial cannabis activity, authorize a local jurisdiction that has established procedures for collecting those administrative penalties to additionally collect specified civil penalties as administrative penalties, and redirect specified portions of civil penalties collected for unlicensed commercial cannabis activity from the General Fund to the treasurers of localities that brought the action for the penalties.

AB 1616 (Lackey), which is pending in this committee, would require the Board of State and Community Corrections to prioritize grant funding for local governments whose proposed programs seek to address the black market.

SB 51 (Bradford), which is pending in the Senate, would authorize the DCC to issue a provisional license for a local equity applicant for retailer activities if the applicant meets specified requirements and authorize the DCC to renew a provisional license until it issues or denies the provisional licensee’s annual license, subject to specified requirements, or until 5 years from the date the provisional license was issued, whichever is earlier.

Prior Related Legislation. AB 2087 (Petrie-Norris) of 2022, which was held on suspense in the Assembly Appropriations Committee, would have established a private right of action for those who received unlicensed dispensing or furnishing of prescription drug services.

ARGUMENTS IN SUPPORT:

The San Diego & Imperial Counties Joint Labor Management Cannabis Committee (JLM) (sponsor) writes in support:

The JLM is a joint venture between UFCW Local 135, which represents over 13,000 unionized employees, and March and Ash, a community-oriented chain of cannabis dispensaries in Southern California…. Five years after the passage of the Adult Use of Marijuana Act (AUMA, Proposition 64 2018), we now find the legal market at risk, including its high-road employers, community entrepreneurs, and contribution to California’s vibrant economy.

Today, good operators in the licensed cannabis industry are under siege on three fronts. They are losing substantial market share to illegal cannabis operators, to licensed cannabis operators operating outside the regulated market, and to companies selling high-potency synthetic THC-like products under the guise of hemp.

Unfortunately, state and local enforcement has been unable to keep up with the growing illicit market. In short, more needs to be done to clamp down on entities illegally selling intoxicating cannabis and cannabis-like products outside of the regulated framework. [This bill] will empower licensed operators to seek judicial relief against their illegal competitors by giving them standing in Superior Court to seek a permanent injunction against unlicensed operators

The devastating impact of this illicit competition is seen in the form of dramatically decreased tax revenue. Between Q2 2021 and Q4 2022, the CDTFA reports that Cannabis Excise Tax Revenue has dropped by 40% (https://www.cdtfa.ca.gov/dataportal/dataset.htm?url=CannabisTaxRevenues).

There is no sign that that download trajectory is slowing. According to Headset, a real-time industry data-tracking company, legal cannabis sales have been in decline for 22 months. In May 2022, there were close to 1,500 brands in the market. Less than a year later, only about 1,000 remain. Some of the largest multi-state operators have exited the California market, characterizing operating conditions as “brutal” and the investment climate as “toxic.”

The persistence of the illicit cannabis market continues to put workers’ lives at risk, degrade our natural resources, endanger community safety, and undermine the stability of the state’s cannabis tax revenue.

We must do more to enforce existing law, to complement our ongoing support for the legal cannabis market.

ARGUMENTS IN OPPOSITION:

None on file

POLICY ISSUES FOR CONSIDERATION:

1. Private Right of Action as an Enforcement Tool. Currently, cannabis licensing requirements are enforced by the DCC and state and local law enforcement, who can seek penalties for behavior that rises to the level of prosecution, including civil penalties. This bill would establish a private right of action, allowing for a type of enforcement of cannabis licensing requirements by licensees against unlicensed cannabis operators. It would be the only private right of action related to unlicensed practice under the Business and Professions Code.

A private right of action is the right to sue to enforce one’s rights in court as a private citizen. However, under this bill, there is no individual right that would be enforced. Unlicensed practice on its own is not a civil matter involving the violation of any party’s rights.

While the enforcement of licensing laws is in the public interest, it is also in the public interest to ensure an individual has in fact committed a violation and, if so, that the punishment fits the violation. As a result, regulators and law enforcement thoroughly investigate violations and build a case before bringing an action.

The private right of action under this bill would bypass that process, allowing an individual licensee to haul an allegedly unlicensed person directly to court. As this bill is written, the only conditions required to file a lawsuit are that (1) the filer is a cannabis licensee and (2) the filer believes the party being sued is engaged in unlicensed cannabis activity. Regulators and law enforcement are trained to understand and investigate violations of the law. A cannabis licensee may not have the same investigatory or legal training. Therefore, there may be some risk of misuse.

1. Efficacy. According to the sponsors, the reason for this bill is that “state and local enforcement has been unable to keep up with the growing illicit market.” However, injunctions are still enforced by law enforcement. If a court finds in favor of a plaintiff licensee and issues an injunction, it would still be up to law enforcement to enforce the injunction. Therefore, a violation of an injunction resulting from a private right of action may present similar enforcement issues as a violation of existing law.
2. Criminal Penalties. Under existing law, if a person identifies unlicensed activity, they may make a complaint to the DCC or law enforcement, and the complaint will be investigated. Whether a criminal misdemeanor is an appropriate charge for the gravity of the violation is up to the prosecuting agency.

Because this bill would bypass the existing enforcement process, it would subject any unlicensed cannabis activity to misdemeanor penalties upon the complaint of a cannabis licensee. While court orders such as injunctions are civil actions, violating them constitutes a misdemeanor offense, resulting in up to 6 months in jail and up to $1000 in fines. Therefore, this bill may criminalize behavior that would not currently be prosecuted as a crime.

1. Standing. This bill establishes a private right of action but does not specify any conditions that would trigger the right, which is known as standing, other than the requirement that the complainant be a licensee. For civil actions, standing is usually based on harm or the potential for harm. The purpose of the civil process is to provide an avenue for those that have suffered harm or are at risk of imminent harm to redress or avoid that harm. If this bill passes this committee, the author may wish to establish identifiable harms that may be redressed through the private right of action.

IMPLEMENTATION ISSUES:

1. Bill Conflict. Section 2 of this bill would create a new BPC § 26038.1. AB 1448 (Wallis), which is pending in this committee, would also create a new BPC § 26038.1, but with a substantially different purpose. If this bill passes this committee in its current form, the author may wish to reconcile that conflict.

REGISTERED SUPPORT:

San Diego & Imperial Counties Joint Labor Management Cannabis Committee (sponsor)

United Food & Commercial Workers Union

REGISTERED OPPOSITION:

None on file

Analysis Prepared by: Vincent Chee / B. & P. / (916) 319-3301