Pushing hard to at last regulate California’s free-for-all medical marijuana industry, state lawmakers are wrestling with how a tightly regulated cannabis market would work.
Increasingly, the answer looks to be a lot like the market for alcohol.
Long-standing alcohol laws rigidly separate producers, distributors and vendors. The decades-old “tied-house” formula was conceived largely as an antidote to the gangsterism of Prohibition, seeking to disrupt the liquor monopolies organized crime groups had established.
If Assembly Bill 266 passes – as looks more likely than with any previous attempt, given the support of law enforcement, cities and the large majority of Assembly members who voted it off the floor – a similar approach could apply to medical cannabis.
At stake is the future of a medical cannabis market estimated to be worth more than $1.2 billion in 2014, from which players profit to which strains of cannabis land in front of consumers. Cannabis vendors and farmers, law enforcement and organized labor have all asserted their vision of what it should look like and whether alcohol laws offer a good model.
This is a brand-new industry, so you don’t know how it’s going to develop.
Barry Broad, lobbyist representing the California Teamsters
“This is a brand-new industry, so you don’t know how it’s going to develop,” said Barry Broad, a lobbyist representing the California Teamsters, who have been advocating the multitier model. “There’s no question that alcohol is more heavily regulated than other products, and marijuana deservedly should be regulated as well.”
Under the current version of the bill, farmers who cultivate or sell cannabis could not transport it to dispensaries themselves. The distribution and transportation would fall to entities like the Teamsters drivers Broad represents. They would get licenses unavailable to growers or vendors.
Public safety provides part of the justification. Law enforcement officials say having additional sets of eyes on the cannabis would make it tougher to divert it to the black market. The middlemen distributors would essentially serve as a check on the cultivators, ensuring their product remains in legitimate channels.
“It’s important to separate the cultivation, the processing, the distribution or sales for the accountability piece,” said California Police Chiefs Association President David Bejarano, who is also chief of the Chula Vista Police Department. “It would be difficult ensuring it doesn’t go to the black market if it’s all clumped together.”
$1.2 billion Estimated size of California’s medical cannabis market
The other argument for the multitiered system is an economic one. The purpose of scattering the process among multiple license holders, Broad said, is to ensure that large-scale cannabis enterprises don’t take over the fledgling marketplace.
“What could happen is a dominant market player could take control of the entire market and freeze out competitors,” Broad said, calling the multitiered model “a mechanism for ensuring everyone gets their access to the market.”
Other provisions in AB 266 seek to prevent large-scale operations from monopolizing the market. Companies that hold both cultivating and dispensing licenses would face limits on how many stores they can run and how many acres of land or square feet of indoor space they can have planted.
But members of the increasingly assertive cannabis industry lobby warn the system could produce some of the same issues regularly spotlighted by small-scale alcohol makers, particularly that it gives distributors too much power.
“We’re very concerned about basically mandating the distribution model for the entire state, because what that will do is allow a few organizations to control the price structure for the entire state, kind of like the exact same way the spirit distributors do it now,” said Nate Bradley, executive director of the California Cannabis Industry Association.
Critics also complain of overly complex rules and frequent exceptions carved out with the help of lobbyists for various alcohol entities. Alcohol suppliers are now allowed to own hotels and theme parks or to advertise at some sports venues, for example. Wineries and craft breweries can sell their products on premises.
“The current alcohol scheme we have has been chipped away at from the first day,” Bradley said.
Last year, Gov. Jerry Brown signed legislation allowing beer manufacturers to sell their products at farmers markets and at private events on their premises. This year, small liquor distilleries are seeking something similar, backing legislation enabling them to sell alcohol during on-site tastings and to have ownership stakes in restaurants.
California Artisanal Distillers Guild executive director Cris Steller said the liquor bill, which was revived after first faltering in a key alcohol-regulating committee, would disrupt distributors’ control over which products make it onto liquor store shelves.
“There’s only so much ability to give up space to smaller brands that don’t have the same brand recognition,” Steller said. “They might have the quality, but they don’t have the name recognition with the public, so the distributors go with larger brands that have much larger advertising budgets and have that ability to influence the market.”
That same dynamic could recur with cannabis, warned Steve DeAngelo, executive director of the Oakland-based Harborside Health Center, which the federal government has sought to shut down.
“It would give a huge amount of branding and marketing power over to the distributors,” DeAngelo said. “Supply and demand is going to dictate that the distributors will have much more economic power than the farmers would.”
Many cannabis farmers see the issue differently. Giving distributors a greater role would minimize the possibility that “a retailer can fill their shelves with only their product (and) can push anyone else out of the market,” said Hezekiah Allen, executive director of the Emerald Growers Association.
It would also give small-scale growers logistical assistance, Allen said.
“Getting cannabis from the far north in Siskiyou County to the far south in San Diego County is virtually impossible,” Allen said, but “an alcoholic beverage can get from a producer to a distributor to a retailer anywhere in the state in two days.”
What are tied-house laws?
- “Tied-house laws” are rules that prevent different tiers of the alcohol industry – manufacturers, wholesalers and retailers – from being tied to one another.
- They were conceived largely as an antidote to the gangsterism of Prohibition, seeking to disrupt the liquor monopolies organized crime groups had established.
- They cover both ownership and marketing. A beer or wine maker generally can’t also own the place where their product is sold, though over the years exceptions have proliferated.