Michigan Cannabis Companies Wanted a Crackdown on Unlicensed Cannabis

July 27, 2023 · Green Market Report

The marijuana industry got what it asked for — and operators are unhappy.

After years of little to no enforcement under former Michigan Cannabis Regulatory Agency Executive Director Andrew Brisbo, operators demanded a change. They wanted regulators to root out the illicit market marijuana entering the legal space and cratering prices and to also punish those involved in the schemes.

Brisbow was reassigned and Gov. Gretchen Whitmer installed Brian Hanna in the role last September. Hanna, a former CRA enforcement agent, and Michigan State Police crime analyst, hit the ground running, ramping up enforcement actions that less than a year later has ensnared many regulated marijuana companies with fines.

The industry is now crying foul and is urging the agency to slow down fines and apply them more evenly under sustained pricing pressure.

“Hanna came in to respond to the screaming and yelling from the industry that needed help with operators breaking the rules or not playing by the rules,” said Ben Sobczak, partner at Detroit-based law firm Dickinson Wright PLLC and former chief legal officer for marijuana Emerald Growth Partners, known by its Pleasantrees brand name. “He’s been conducting himself accordingly. Everyone is getting hammered and I don’t see the CRA making a distinction between bad operators and well-intentioned operators that made a mistake because this business is complicated.”

Rank and file

Hanna was hired after the state announced founding Executive Director Brisbo would depart the role to become the head of the Bureau of Construction Codes within the Department of Licensing and Regulatory Affairs.

The industry’s largest players had been quietly critical of Brisbo for not taking a more hard-nosed stance on the illicit marijuana market and caregivers who are feeding into the medical marijuana system.

Adult-use prices had collapsed from $512.05 per ounce of flower in December 2020 to $109.88 per ounce in September last year when Hanna took over. Prices have settled in recent months to around $90 an ounce.

Lansing-based Anderson Economic Group published an analysis in October 2021 that two-thirds of all cannabis in Michigan originated from illicit sources. The industry responded by publishing op-eds to call for a stricter regulatory approach.

“The number one threat to Michigan’s regulated cannabis industry remains a massive illicit market that is destabilizing and undermining the licensed regulated market,” Shelly Edgerton, a former CRA employee that led the now defunct Michigan Cannabis Manufacturers Association, said in an op-ed published in Crain’s in December last year. “That’s why so many in the cannabis industry at every level have called for the need to ramp up enforcement.”

By that same month, Hanna had received a larger budget at the CRA and promised to increase oversight with the hiring of six new investigators, two inspectors along with legal analysts and scientists.

“These additional staff will help the CRA increase the number of unannounced inspections that are currently conducted and planned for in the near future,” Hanna said in an op-ed published in Crain’s.

And Hanna has followed through.

Between January and June of this year, the CRA has issued 129 disciplinary actions or nearly 22 per month. That’s up from an average of less than six disciplinary actions last year.

Overgrown or blooming?

The industry claims the growing number of fines are applied aggressively across the board and make no distinction between those using illicit market product and those that have simply made a paperwork error on their Annual Financial States (AFS) and have reported their error. An AFS violation carries a standard $10,000 fine per day, per violation.

“One thing that seems consistent is there isn’t much rhyme or reason for how these fines are calculated,” said Megan Callahan-Krol, marijuana attorney at Grand Rapids-based law firm Miller Johnson. “We always advise clients to self-report, because the CRA is going to find out one way or another. But it feels like there’s no favor to cooperation. The industry overwhelmingly does want to comply with the rules, but for businesses to self-report and correct the problem only to get penalized just as hard as those that don’t, it discourages (self-reporting). When one error that happened six months ago and is self-reported is getting the same fine as a violation that’s happened 10 times and wasn’t self-reported, that’s really frustrating for the industry.”

Callahan-Krol said many disciplinary actions are made a year or two after the error was self-reported and corrected.

Regarding the AFS violations, Hanna said the industry required a strong hand because they were constantly late in filing their paperwork, which helps the state properly regulate the industry.

“We’ve been very consistent in our AFS fines,” Hanna said. “And guess what? People are on time with their AFS turn-ins now.”

Both Sobczak and Callahan-Krol pointed to the disciplinary action levied against Mt. Morris-based processor Sky Labs LLC late last month.

CRA investigators discovered unmarked marijuana, which could have come from illicit market sources, as well as packaged marijuana products that were not tested. In June last year, the processor distributed edible gummies labeled as not containing any psychoactive THC, but CBD. An employee gave 20 milligrams of the edibles to their four-year-old child, which did in fact contain THC, resulting in the hospitalization of the child, according to a notice by the CRA.

Sky Labs surrendered its medical marijuana license but retained its more valuable adult-use recreational license and was slapped with a $100,000 fine.

“These folks violated several different types of rules and it still somehow got worse (referencing the child’s hospitalization) and all they got was a $100,000 fine,” Sobczak said. “I am seeing people who self-reported with a single set of facts for a regulatory violation with no secondary or residual harm who are getting fined $50,000 and above. How can you rectify those things?”

Hanna said the fines are determined on a case-by-case basis over circumstances that are not made available to the public.

“We hear some of the concerns over the fines, but there are factors that happen individually,” Hanna said. “Sometimes we get ghosted. Sometimes we call and never even get a response back. These are concerning things when we’re trying to investigate a violation, no matter what kind.”

The CRA last week also issued a recall of more than 15,000 vape cartridges produced by Sky Labs and sold to more than 59 dispensaries. The vapes allegedly contain banned pesticides and fungicides.

Seeds of change

The industry is pushing for a fine schedule, which defines what the fines will be for each violation, from the CRA to have a better gauge on what to expect with fines.

“We keep asking for a fine schedule, which is common in more matured industries,” Sobczak said. “We need to be able to advise clients on what to expect and it takes some of the feeling of subjectivity out of this.”

Hanna said the CRA has received these requests and is open to determining a fine schedule, eventually. The CRA is in the process of taking feedback on 95 proposed rule changes.

The list of proposed rules, released in May, included giving the agency authority to deny licenses to businesses that don’t pay vendors, requiring applicants to notify the CRA of doing-business-as names and required proof of insurance, among others.

A fine schedule is not included in the current changes, but Hanna did not rule out an addition.

“All things are under consideration,” Hanna said. “We’re looking at everything. Look, it’s a process improvement thing. We’re all in this together and learning.”

The feedback process won’t end until the end of 2023, Hanna said, and implementation of the new rules likely wouldn’t happen until late 2024. (Full Story)

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