/Statewide delivery policy ‘critical’ to cannabis industry success, California insiders say ahead of key court case

Statewide delivery policy ‘critical’ to cannabis industry success, California insiders say ahead of key court case

A controversial policy adopted last year by California that allows delivery of marijuana products anywhere in the state – even into areas where local municipalities have banned adult-use cannabis stores – is crucial to the ongoing success of the legal market, according to several delivery company officials.

Those same officials told Marijuana Business Daily they fear what might happen if the policy is thrown out by the courts next year, since a lawsuit challenging that policy is slated to go to trial in Fresno Superior Court on April 20.

If successful, it could threaten plenty of delivery companies with extinction and likely further bolster the state’s immense illegal marijuana market.

The lawsuit, filed by 24 municipalities and Santa Cruz County, contends the California Bureau of Cannabis Control (BCC) overstepped its authority with the statewide delivery rule.

The suit argues that Proposition 64 – which legalized recreational marijuana in 2016 – specifically allowed local governments to prohibit commercial cannabis activity within their borders, and the BCC’s policy undermines that right.

The case has the potential to upend much of California’s delivery business if it succeeds, said Eric Sklar, CEO of Clearlake-based Fumé Brands, a retailer and delivery business north of San Francisco that serves much of the state’s famed wine region.

“If it wasn’t for the state’s policy on outside-in delivery, the entire cannabis experiment would fail,” said Sklar, who also is a public official as a member of the state’s Fish and Game Commission.

“We have too few dispensaries, because localities are barring them. … The outside-in model is the single thing saving the system right now,” Sklar said, referring to the practice of delivering into a jurisdiction from a hub located outside a town or county.

Sklar estimated up to 75% of the deliveries performed by his company into seven neighboring counties are performed under the BCC’s statewide delivery policy and service jurisdictions that would otherwise remain off-limits.

He said many other delivery businesses face similar situations because roughly two-thirds of California municipalities and counties prohibit licensed brick-and-mortar marijuana retailers within their borders, and there are only about 260 delivery operators to cover the entire state.

A countersuit, filed against Santa Cruz County by Salinas-based marijuana retailer East of Eden, is on the docket in Santa Cruz Superior Court and is slated to be heard in July.

Attorney General Xavier Becerra’s office has filed paperwork in that lawsuit asking to join as a party in defense of the BCC’s policy – a move Sklar called “very significant.”

“It’s almost impossible to overstate how important it is that the state is taking this position,” Sklar said.

“If they hadn’t, there wouldn’t be a chance in hell that we would have outside-in deliveries in the state.”

Wide application of the delivery policy

The BCC’s announcement of its statewide delivery policy was a game-changer for many delivery companies searching for a legal home for their delivery hubs and also wondering what their business models were going to look like, said Zach Pitts, a board member of the California Cannabis Couriers Association.

When the new legal system was rolled out in January 2018, the only delivery operators legally allowed to do business were those that had municipalities or counties offering them local licenses.

So many, like Pitts, had to relocate from Los Angeles – or other cities that weren’t quick about licensing – to more industry-friendly locations so they could continue doing business.

The statewide delivery policy was formally rolled out last summer and arguably saved many delivery companies, just by expanding their customer base geographically.

“Literally every single delivery operator that I know of delivers outside of their jurisdiction,” Pitts said.

He called the policy “critical” to the ongoing success of his company, Oakland-based Goddess Delivers, as well as the rest of the legal delivery sector.

According to Eaze, a tech company that helps facilitate online marijuana orders, a whopping 595,000 deliveries have been placed through its platform by 376,000 customers since July 2018 in California jurisdictions that prohibit cannabis shops.

If the BCC’s statewide delivery policy were not in place, it’s likely those transactions would have occurred in California’s thriving illicit market, Pitts said.

“What’s been even the most critical about this is offsetting and preventing even more of an expansion of the black market,” Pitts said.

Pitts estimated that 90% of Goddess Delivers’ orders are to customers in cities or counties with commercial marijuana bans in place.

Brian Hayek, president of Los Angeles-based Driven Deliveries, said the policy shift opened up another 30% of the state to deliveries for his company, which equated to an additional 9 million-10 million people as potential customers.

What if?

While many delivery operators are banking on the state winning its case and the policy remaining in place, it’s conceivable the court might overturn it.

However, some delivery operators are situated geographically well enough that even if the worst-case scenario came to pass – and the statewide delivery policy was thrown out by a judge – they could pivot and survive even with a severely diminished customer base.

Or, some said, the case might stall in court for so long that it won’t matter.

“If they’re able to win that lawsuit, it’s going to get appealed and be one of those ongoing court cases forever, until (marijuana) goes federally legal and federal law trumps everything,” said Monica Gray, chief operating officer of San Rafael-based Nice Guys Delivery and Distribution.

Gray believes her company can adapt if statewide delivery comes to an end merely by relying on her distribution business and customers who live in regions where it’s legal for her to deliver around the San Francisco Bay Area.

But she’s also skeptical of how anti-cannabis cities could enforce a ban on marijuana deliveries anyway, given that most delivery drivers are in personal, unmarked cars.

“How are they going to take a delivery driver, figure out that they’re cannabis and pull them over and say, ‘You can’t be delivering here?’” Gray asked.

That’s why Gray believes that, if the BCC’s policy is overturned, it would “ignite the black market” because it’ll remain easy for illegal delivery services to keep doing what they’ve been doing without getting caught.

John Schroyer can be reached at [email protected]