California CannabisOn September 11, 2015, California legislators passed the Medical Marijuana Regulation and Safety Act (MMRSA). The Act went into effect as of January 1, 2016 and the state is slated to begin accepting applications for state licenses by 2018. The MMRSA is composed of three separate bills: AB 266, AB 243, and AB 643. As per usual, the bills contain a sufficient amount of “legalese,” resulting in some confusion within the California cannabis industry. There has been particular confusion surrounding the role of a “distributor” under the MMRSA, as the same term has been used in other contexts, the most common of which is the regulated alcohol industry. There is concern in the cannabis community that state regulations for marijuana will too closely mirror those for alcohol, and these concerns are not unfounded considering evidence that states are basing their marijuana models on existing alcohol regulations.

California’s alcohol market has a three-tiered system that includes producers, distributors, and retailers. The original intent of implementing this three-tiered system was to cure one of the problems that ultimately led to alcohol prohibition: producers who sold directly to retailers placed pressure on retailers to increase their sales of alcohol, thus encouraging overconsumption by consumers. By adding a distributor as a middle man between the producer and retailer, producers no longer had the power to pressure retailers and thus the system was seen as a better solution for public health. Only distributors can arrange sales with retailers and these distributors are subject to several limitations, including the requirement to offer the same price to all retailers.

Now let’s compare this with the system for marijuana distributors under California’s MMRSA. The MMRSA defines “distribution” as “the procurement, sale, and transport of medical cannabis and medical cannabis products between entities licensed pursuant to this chapter” (AB 266, 19300.5(p)), and defines a “distributor” as “a person licensed under this chapter to engage in the business of purchasing medical cannabis from a licensed cultivator, or medical cannabis products from a licensed manufacturer, for sale to a licensed dispensary” (AB 266, 19300.5(q)).

Many in the cannabis industry are unhappy about the addition of a distributor as a “middle man” under the MMRSA, as this is not a role which presently exists in the current marijuana market. However, some of this frustration may be due to the misconception that marijuana distributors will take on the same role as alcohol distributors. This is understandable considering the definition under Section 19300.5 makes it sound like only distributors will be allowed to buy marijuana products from cultivators and manufacturers to then sell to licensed retailers. However, in contrast to the alcohol distribution model, the MMRSA does not limit the ability of marijuana producers to arrange sales directly with retailers. Instead, the function of distributors is to act as the exclusive channel for transporting products from producers (cultivators and manufacturers) to testing labs for quality assurance and batch testing, as required for all medical marijuana products under the MMRSA (AB 266, 19326(b)). But after the testing is complete, distributors can either transport the tested products directly to a retail dispensary or to the same or different producers. This all depends on the contracts created by the producers. Distributors will transport the marijuana products where they are directed to under contract, and the producers themselves maintain the right to contract for sales to retailers or other licensees.

The MMRSA “does not limit the ability of licensed cultivators, manufacturers, and dispensaries to directly enter into contracts with one another indicating the price and quantity of medical cannabis or medical cannabis products to be distributed” though distributors can collect a fee for their services (AB 266, 19362(c)(3)). Thus, marijuana producers will be able to arrange for direct sales to retailers, set pricing and terms for the sale of their products, and continue to build valuable relationships with the retailers of their choice.

In fact, because the MMRSA allows for limited vertical integration, a Type 10A licensed dispensary can also have a cultivation or manufacturing license and thus be both a producer and a retailer (which is not allowed under the alcohol three-tiered system). In this case, the double license holder would produce the marijuana products, then it would contract for a distributor to provide the required quality assurance and transportation to a lab for testing, and finally the distributor would transport the product to the license holder’s own retail site. This type of transaction could never happen under the alcohol system and proves that a distributor under the MMRSA was not meant to act as the marijuana equivalent of an alcohol distributor. Though one way in which marijuana and alcohol distributors may serve the same purpose is taxes, which when applied at the distributor level ensures that all products that pass through the state system will be hit with a state-level tax.

Another interesting element of the new marijuana distributor under the MMRSA is the opportunity it creates for new businesses to step in and serve this previously unnecessary role. We’re counting the days until California begins accepting license applications in 2018 and there will be several Type 11 distribution licenses up for grabs for anyone interested in entering this untapped segment of the marijuana market.

  • Joey Espinoza

    I wouldn’t say this really ‘demystified’ anything. I feel most people were aware they can get back the product they grow, it’s just the fact of this fee the distributor will charge for being the middle man. That’s what people are pissed about, sure we can create contracts with dispensaries as cultivators, but we still have a forced middle man that will drive up the prices.

    You think a cultivator is going to cut the retailer a deal just because of a forced middle man? Of course not, the cultivator will make sure he gets a fair cut, as will the distributor as will the retailer which ultimately means the consumer will suffer.

    When the consumer suffers, the black market thrives. This distributor model looks to only drive the black market further because people won’t want to pay a high price at the dispensary when they can get an eighth for $25-$35 cheaper on the streets for the same quality.

  • Ultimately, how much distributors charge under MMRSA will be determined by competition. Who in the community will take up the challenge and offer distribution services for a reasonable price?

    We’ve previously made this and many of the points in this blog post some days ago.

    One other important item to point out is that non-medical licenses under AUMA would not require the involvement of a distributor, and those licenses are also supposed to start issuing January 2018, assuming of course AUMA passes in November.

    • Denis Angell

      I will!!!

  • Shirley LeGitte

    MMRSA is restrictive enough, that a black market will still thrive…not everybody who consumes marijuana in California has a medical recommendation, or cares to get one, after all.

  • I appreciate the breakdown, but here’s a question. Does the distributor have to charge a fixed rate to all producers, so that they CAN negotiate contracts with retailers?

  • Kai

    Joey Espinoza has a valid point.

    MMRSA doesnt help ANYONE out except big businesses trying to throttle control of the cannabis market. The current model works just fine for everyone to whom it currently applies. Cultivators can grow their medicine and sell it to dispensaries or even patients directly at no extra cost. FORCING a middle man will do exactly as Joey said, drive up storefront prices in addition to driving DOWN storefront QUALITY. When patients aren’t satisfied paying $70 an 8th for their regular top shelf, or now having to pay $40 for some cheap and low quality “medicine” guess who will take over cultivation? Big agriculture businesses which can pump out pounds of bud for dimes on the dollar.

    A key point which this article has not demystified is WHO CAN BE COME A DISTRIBUTOR and AT WHAT COST?

    Distributors **already exist.** Plenty, if not most, cultivators and producers can and do choose to work with a distributor to save time on sales to they can focus on growing and producing a better product. So individuals are specializing. What happens to all of those individuals and companies which already occupy this Distribution role? For some this is their livelihood. How much will it cost to become a distributor? How will the state determine WHO gets a license? Can the hundreds (thousands?) of people who already make a living doing this still continue operating in this industry? How many people will these new distribution laws put out of work?

  • Nate

    How does one go about obtaining a distribution license; do you have to have adequate space and or a chosen location before applying? What percentages of applicants do you believe will be approved?