Governor Proposes Bill to Remove Restrictions on Vertical Integration in the Medical Cannabis Industry

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As part of the 2017-2018 budget process, the Governor has unveiled “budget trailer bill legislation”: the “Medicinal and Adult-Use Cannabis Regulation and Safety Act.” This legislation would merge the state’s regulatory scheme for medicinal and recreational cannabis. Most notably, it would remove restrictions on vertical integration in the medical cannabis industry.

The “Medical and Adult-Use Cannabis Regulation and Safety Act” would Consolidate California’s Medical and Recreational Cannabis Regulatory Schemes


The effect on the burgeoning medical cannabis market could be profound, as the restrictions on vertical integration in the medical cannabis industry has been a significant obstacle for entrepreneurs.

The Budget Process

In January, the Governor issued his proposed budget. A revised version is planned for May, with the final version to be enacted sometime over the summer. Looming large in the budget are issues related to cannabis, with the initial budget allocating $51 million for regulatory implementation and creation of nearly 200 new positions in 2017-2018.

Budget Uncertainty Highlights the Need to Streamline Cannabis Regulation

There is great uncertainty around how to budget for California’s plan to regulate cannabis. For starters, the departments charged with regulating cannabis are still drafting their regulations. Also, there is a wide range of estimates for just how large the legal cannabis industry will be. The Board of Equalization, for example, believes that there will be 1,700 dispensaries and retailers, while the Department of Consumer Affairs puts that number at 6,000.

In the face of such uncertainty, simplifying the cannabis regulatory scheme is an attractive opportunity to reduce costs. Current law calls for parallel, partially duplicative regulatory schemes: one for medical cannabis under the Medical Cannabis Regulation Act (“MCRSA”) and one for non-medical cannabis under the Adult Use of Marijuana Act of 2016 (“AUMA”).

The Governor’s Budget Summary acknowledged this problem:

“As the state moves forward with the regulation of both medical cannabis and recreational cannabis, one regulatory structure of cannabis activities across California is needed. Implementing the current medical and recreational cannabis statutes separately will result in duplicative costs of an additional $25 million for a second track and trace system. Additionally, a separate regulatory framework for each would lead to confusion among licensees and regulatory agencies, undermining consumer protection and public safety.”

The Proposed Measures to Streamline Cannabis Regulation

The Governor’s proposed legislation contains multiple measures for aligning MCRSA and AUMA, and these could have significant industry-wide effects. We cover a few of the prominent changes below.

Remove MCRSA’s Restrictions on Vertical Integration in the Medical Cannabis Industry

MCRSA includes various (and confusing) restrictions on which licenses may be held in combination. Other than prohibiting testing laboratories from holding any other license, AUMA lacks these restrictions.

The Governor’s position is that

“[o]verly restrictive vertical integration stifles new business models and does not enhance public and consumer safety.”

The proposed legislation, therefore, would remove MCRSA’s restrictions on vertical integration in the medical cannabis industry and replace it with AUMA’s licensing structure. This change would resolve current confusion about license availability and enable regulators to better predict the volume of license applications it will receive.

Moreover, modifying the MCRSA, as opposed to AUMA, to bring the laws into alignment may be the only option: Because AUMA was a voter initiative, the Legislature has narrower authority amend it. The Legislature can only make changes to AUMA that are consistent with its “purposes and intent,” and burdening the industry with MCRSA’s vertical integration restrictions may fail that test.

 Adoption of AUMA’s Open Distribution Model for Medical Cannabis

Under MCRSA, medical cannabis must go through a third-party “distributor,” which is responsible for arranging testing of the product before it goes to market. MCRSA requires distributors to hold a transporter license but prohibits them from holding any other license. In contrast, a “distributor” license under AUMA concerns only transportation activities, and a distributor can hold any other license besides a testing license.

The proposed legislation would adopt AUMA’s license structure for medical cannabis and allow cultivation, manufacturing, and retail businesses to hold distribution licenses.


The Governor’s proposal represents a sharp departure from the current MCRSA approach of restricting activities of distributors. According to the Governor,

“Allowing for a business to hold multiple licenses including a distribution license will make it easier for businesses to enter the market, encourage innovation, and strengthen compliance with state law.”

Move Oversight of Testing Under AUMA to the Department of Consumer Affairs

Under MCRSA, authority over medical cannabis testing labs lies with the Department of Consumer Affairs. But under AUMA, authority over non-medical cannabis testing labs lies with the Department of Public Health. This is an obvious inefficiency, and the governor’s proposed trailer bill would fix it.

Implement a Single Track and Trace System

There is no compelling reason to have duplicative separate track and trace systems—one for medical cannabis and another for recreational cannabis. The Governor’s Budget Summary estimates the waste at $25 million, an extra cost that ultimately would burden cannabis businesses and consumers. The Governor’s trailer bill would merge the two systems into one.

Stay tuned for updates on how the Legislature responds to the Governor’s proposal.

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