California Sees First Major Legal Challenge to Cannabis Cultivation Regulations

State v. small growers: Who ya got?The California Growers Association, which advocates for small and independent cannabis cultivators, recently sued the California Department of Food and Agriculture, the state agency charged with crafting and implementing cannabis cultivation regulations. The lawsuit stems from one of the biggest controversies in the state’s 2017 emergency regulations: a loophole in the licensing scheme that would effectively allow cultivators to set up mega farms by “stacking” unlimited small grow licenses. We discussed this precise issue at length at the end of 2017, and the matter is now the subject of legal challenge.
The gist of the lawsuit is that the CDFA’s failure to include a cap on small (5,001-10,000 square feet of canopy) cultivation licenses is inconsistent with MAUCRSA, the statute authorizing the CDFA to promulgate cultivation regulations. MAUCRSA generally prohibits large cultivation licenses (over 22,000 sq. ft. of indoor canopy or over 1 acre of outdoor canopy) until 2023, and limits medium cultivation licenses (10,001-22,000 sq. ft. of indoor canopy or up to 1 acre of outdoor canopy) to one per person for five years. The CDFA regulations contain no such cap on small cultivation licenses. Because the lack of a cap would essentially allow growers to do what they would otherwise be prohibited by statute from doing until 2023—i.e. cultivating more than 1 acre per person—the plaintiffs contend that the regulations are inconsistent with the statute, and that judicial intervention is needed to make them consistent by limiting total license issuance to one acre per applicant. It also bears mentioning that the state’s own environmental report recommended allowing no larger than one acre of cultivation per licensee.
Under California’s Administrative Procedure Act, one basis for challenging agency rules—and the grounds utilized by the plaintiffs here—is consistency, which is defined by the statute as “being in harmony with, and not in conflict with or contradictory to, existing statutes, court decisions, or other provisions of law.” If the CDFA regulations conflict with or contradict MAUCRSA, they are subject to challenge. However, the plaintiffs are not asking the court to invalidate the regulations altogether—only to limit small cultivation licenses to an aggregate of one acre per applicant.
Supporters of the CDFA’s approach would argue that MAUCRSA’s notable absence of a cap on small licenses, alongside explicit caps on other types of licenses, would suggest that the regulations’ reflection of that same approach is actually consistent with the statute and with legislative intent, and not the other way around. And in any event, it’s not clear what effect, if any, a short-term limitation on small grow licenses would have on market prices and competition. It remains to be seen how stringently the state will enforce regulations such as the track-and-trace program aimed in part at excluding illicit supply from entering the market (California already had an oversupply problem even before Prop 64 was passed). It’s also an open question as to how discerning consumers will be for variations in quality and speciality strains (i.e. how fungible farmed cannabis will be). It’s also unclear what effect excessive taxation might have on demand for licensed cannabis and whether consumers may be drawn to the illegal market (which is already rife with illicit mega farms).
Whichever way the CGA’s lawsuit goes, the outcome is sure to impact cultivation licensing in California and business planning for growers, but it’s not clear how much of an effect it will have on overall market demand for cannabis one way or the other. Regardless, this case is an interesting one to keep an eye on as the first substantial legal challenge to the state’s new cannabis regulations.

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