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This Bud's for You

By Donna Mallard | May 2, 2015

Law Office Management

May 2, 2015

This Bud's for You

Pot delivery apps exemplify the lack of clear rules surrounding medical marijuana.

When Detective Vincent Bancroft of the Los Angeles Police Department's gangs and narcotics division heard about a mobile app that allows people to order medical marijuana from local dispensaries via smartphones, it piqued his interest. From articles about Nestdrop he read online-on local news websites and (for college students)-Bancroft learned that the service takes orders from smartphone users and then subcontracts the order to local weed-delivery services around Los Angeles, according to a court declaration late last year. Deliveries are made within an hour, Nestdrop co-founder Michael Pycher promised in an interview with LA Weekly.

Bancroft launched an investigation that involved downloading the Nestdrop app. "Sit back, relax, enjoy the drop! Your phone now sends alcohol and medical marijuana to your door!" the app's first page greeted him. "At this pivotal point in history," it went on to say, "we stand as pioneers ready to define tomorrow." Among the available products listed under the heading "Bud" were Blackberry Kush, Diesel Dog, and Grand Daddy Purple.

For an LAPD division normally associated with busting violent gangs and high-level drug-trafficking enterprises, a mobile marijuana-delivery app might seem like small fry. But the number of pot-delivery services nationwide has nearly tripled in three years-from 877 to 2,617-according to Weedmaps, which lists marijuana businesses on its website and posts users' reviews. And Bancroft, who had spent more than two years assigned to Los Angeles's task force on pot dispensaries, was the city's go-to guy for enforcing an ordinance intended to confine the distribution of medical marijuana.

Proposition D, approved by L.A. voters in May 2013, gave qualified immunity to medical marijuana dispensaries that had registered under a string of ordinances going back to 2007. The measure amended the municipal code to outlaw all marijuana businesses but grant limited immunity from enforcement to those businesses that adhere to certain restrictions aimed at curtailing secondary effects such as criminal activity. It also raised the existing tax on dispensaries' gross receipts, from $50 to $60 per each $1,000.

Since Prop. D took effect, City Attorney Mike Feuer says, his office has brought more than 200 cases against 743 defendants, including dispensary operators and property owners.

Detective Bancroft himself has helped bust a variety of enterprises, including the city's first-ever cannabis farmers market. So when he read about Nestdrop, he suspected that the company was angling to profit from marijuana sales without registering as a dispensary.

Early in December, Bancroft placed a $75 order with Nestdrop for four grams each of 91 OG-listed as "top-shelf indica"-and Blackberry Kush, with free delivery. He concluded that Nestdrop "was active and facilitating medical marijuana deliveries in the City of Los Angeles."

That same day, Feuer's office filed suit seeking abatement, injunction, equitable relief, and civil penalties. (People v. Nestdrop LLC, No. BC565409 (L.A. Super. Ct. filed Dec. 2, 2014).) "This app is a flagrant attempt to circumvent the will of the voters who passed Prop. D," Feuer proclaimed in a statement.

In response, Arthur D. Hodge, a solo practitioner in Carlsbad who represented Nestdrop at the time, argued that a social media app is not a medical marijuana business subject to the ordinance. And in any case, he asserted, the law allows delivery by a dispensary that maintains a fixed location and meets the law's other immunity requirements. If Nestdrop's subcontractors are immune, Hodge reasoned, then Nestdrop cannot be prohibited from facilitating delivery.

Three weeks later, however, Los Angeles Superior Court Judge Robert H. O'Brien issued a preliminary injunction barring Nestdrop from developing or marketing any computer program that facilitates marijuana delivery in any way. (People v. Nestdrop LLC, No. BC565409 (L.A. Super. Ct. order filed Dec. 23, 2014).)

In theory, O'Brien's ruling could apply to the entire delivery industry in Los Angeles. And that has medical marijuana advocates worried. To them, the Nestdrop case exemplifies the lack of effective regulatory guidance that has bedeviled California cities ever since state voters in 1996 passed the Compassionate Use Act (CUA), which provided for the use and cultivation of marijuana for medical purposes. (See Cal. Health & Saf. Code § 11362.5.) But 19 years later, advocates, judges, law enforcers, and legislators still grapple with precisely how medical marijuana users should be allowed to obtain their supplies.

In an open letter to Feuer, Nestdrop's Pycher asserted in March, "[T]he current case against the company is unsubstantiated given the lack of explicit laws your office has been able to point to justifying the ban of Medical Marijuana delivery to registered patients or the technology surrounding it. Nor is the onus on Nestdrop to discern the city's ever evolving stances surrounding Proposition D and how it pertains to collectives."

Joe Elford, a San Francisco attorney and former chief counsel for the advocacy group Americans for Safe Access, adds, "[I]t takes a long time to sort out these issues-this is all unique in the criminal justice system."

Meanwhile, efforts are under way to qualify a 2016 ballot initiative that would largely moot the debate, legalizing the recreational use of pot across California.

No regulations governing the possession, cultivation, or distribution of medical marijuana were included in the statewide Compassionate Use Act. Legislators tried to fill in some of the gaps in 2003 with the Medical Marijuana Program Act (MMPA); among other things, it established a medical marijuana identification card and a registry database to verify qualified patients and their primary caregivers "who associate within the State of California in order collectively or cooperatively to cultivate marijuana for medical purposes." But the law didn't address much on the distribution side, instructing the state attorney general only to "develop and adopt guidelines to ensure the security and nondiversion" of the crop. (Cal. Health & Saf. Code § 11362.775.)

"The goal was to provide some needed clarification because the [CUA] was ambiguous or silent or sloppily written in various respects," recalls Bill Lockyer, who, as attorney general at the time, helped get the MMPA passed. As for dispensaries, he says, legislators took the path of least resistance, opting for "the laissez-faire system of local control that we have now."

"Statewide land-use [regulation] is not frequently done," Lockyer explains. "There were a lot of concerns about having the state preempt [local government entities in] that area."

In 2008, then-state Attorney General Jerry Brown duly produced a nonbinding, eleven-page document meant to "clarify the state's laws governing medical marijuana and provide clear guidelines for patients and law enforcement to ensure that medical marijuana is not diverted to illicit markets." Brown noted that cooperatives have certain statutory requirements, but California law does not define collectives. So he offered a series of "suggested guidelines and practices" to help ensure lawful operation. The document also referenced a state Board of Equalization notice confirming its policy of taxing medical marijuana transactions.

Yet within three years Brown's successor, Kamala Harris, was asking lawmakers for further clarification. "[S]tate law ... needs to be reformed, simplified, and improved to better explain to law enforcement and patients alike how, when, and where individuals may cultivate and obtain physician-recommended marijuana," Harris wrote in a 2011 letter to the legislative leadership.

Even as local police attempt to shut down dispensaries, panels of the second, third, and fourth district courts of appeal have rejected the view that section 11362.775 of the MMPA prohibits operation of a nonprofit business involving exchange of marijuana for money between members of a collective or cooperative. A decade ago, the third district ruled that the law "contemplates the formation and operation of medicinal marijuana cooperatives that would receive reimbursement for marijuana and the services provided in conjunction with the provision of that marijuana." (People v. Urziceanu, 132 Cal. App. 4th 747, 785 (2005).)

Despite efforts by some legislators, no guidance on dispensary regulation has been forthcoming from Sacramento. The result has been an unruly patchwork of land-use regulation. "Each city treats [marijuana] businesses differently," Hodge observes. "They're across the board." Some 200 California municipalities ban dispensaries outright; others, such as San Francisco, require permits; and still others allow only delivery services to operate within their boundaries. In February, Santa Ana held a lottery for permit applications to operate medical marijuana dispensaries in designated industrial areas.

When the California Supreme Court upheld the city of Riverside's ban in May 2013, the justices ruled that the CUA and MMPA do not limit "the inherent authority of a local jurisdiction, by its own ordinances, to regulate the use of its land, including the authority to provide that facilities for the distribution of medical marijuana will not be permitted to operate within its borders." (City of Riverside v. Inland Empire Patients Health & Wellness Ctr., 56 Cal. 4th 729, 738 (2013).)

Yet the Inland Empire ruling did not unleash a new flood of bans. Attorney Steven Quintanilla of Rancho Mirage, whose clients include several cities in Southern California, says he sees more movement toward regulating dispensaries through a licensing system. "Now we know we can regulate them, we can permit them," he says. "It boils down to [strategies for] land use and control." (See "The Struggle in Small Cities,")

The Los Angeles City Council's first effort to regulate medical marijuana distribution came in August 2007, when it passed a moratorium on new dispensaries. Known as an interim control ordinance (ICO), the stopgap measure was intended to give officials time to establish permanent regulations.

The ICO permitted only 187 dispensaries that registered on or before November 2007 to continue operating. Unfortunately, it contained a general hardship exemption that could be granted by the city council-leading to hundreds of applications by dispensaries that filed their papers and opened for business. In 2009 National Public Radio famously reported that some California neighborhoods had more pot dispensaries than Starbucks franchises.

That June the Los Angeles City Council amended the ICO, and in January 2010 it passed a permanent city ordinance (Los Angeles Mun. Code §§ 45.19.6-45.19.10) to regulate the number and geographic distribution of pot shops within city limits. The ordinance attracted numerous lawsuits, and in December 2010 Superior Court Judge Anthony J. Mohr declared it unconstitutional and issued a preliminary injunction. The city appealed; two years later the court of appeal reversed. (420 Caregivers LLC v. City of Los Angeles, 219 Cal. App. 4th 1316 (2012).)

By then, however, the number of dispensaries in the city had swollen to more than 900 by one estimate, though a UCLA study found 472. The city council tried banning pot shops altogether, then repealed the ban several months later rather than face a referendum backed by marijuana businesses. "Where does anybody go, even a councilman ... to get his medical marijuana?" pleaded Council Member Bill Rosendahl, who was undergoing chemotherapy for cancer at the time.

In 2013 the city's Prop. D, backed by the council, passed with nearly two-thirds of the popular vote. When the law took effect that June, the city published a list of the 134 dispensaries that it said qualified for immunity from prosecution.

Although Feuer, who took office in July 2013, claims to have closed more than 400 pot shops, these days the city attorney's website no longer offers a list of registered dispensaries. Attorney Hodge, who has represented numerous pot stores in legal battles with the city, says the roster was so inaccurate as to be useless: Some of the outlets listed had been closed down in federal Drug Enforcement Administration raids "years ago."

Currently, a two-block stretch of Ventura Boulevard in the west San Fernando Valley features three dispensaries. Mother Nature's Remedy, a storefront sandwiched between a foot spa and an office building, and The Exchange, in a strip mall adjacent to a kid's gym, have taken the place of dispensaries that were prosecuted by the city. West Valley Caregivers, too, has been prosecuted but remains open. The signage on its ground-floor entrance in a mixed-use building bears witness to the legal convolutions it has endured, proclaiming that because it was established in 2005 it is "pre-ICO," and that it is "Prop. D compliant" as well.

Hodge describes Prop. D as "a free-for-all grandfather thing" that has left legitimate dispensary owners in a state of legal limbo. "There's no way of finding out if you're qualified under Proposition D until you're charged [with violating it]," he complains.

Some eleven years after passage of California's MMPA, in February 2014, then-state Sen. Lou Correa (D-Santa Ana) proposed SB 1262 to create a regulatory and licensing structure for medical marijuana businesses. But the measure died in the Assembly amid disagreements over who should enforce it. Marijuana advocacy groups also had opposed the bill because, among other things, it capped the number of licensed cultivators, imposed an $8,000 fee on each one, and barred anyone convicted of felony drug trafficking from running a dispensary.

The South Los Angeles district of Assemblymember Reggie Jones-Sawyer (D-Los Angeles) is home to about three dozen dispensaries, Weedmaps shows. This year Jones-Sawyer introduced AB 26 to empower the state Department of Alcoholic Beverage Control to "register persons for the cultivation, manufacture, testing, transportation, storage, distribution, and sale of medical cannabis within the state"-and to lay the groundwork for uniform statewide taxation of marijuana businesses. The bill, patterned after one introduced last year by former Assemblymember Tom Ammiano (D-San Francisco), also permits a county board of supervisors to impose additional taxes by ordinance.

Registration and control aren't the only unresolved issues, Quintanilla adds. Consumers of medical marijuana need assurance about the quality and strength of their medicine. "Who's selling it? Where did they grow it? We need to make sure it's safe," he says. "I see too many people just trusting these [distributors]. A lot of them come from the underground market. They're not used to regulation."

But the Legislature may defer any action until California decides whether to legalize recreational marijuana. "Many people expect a marijuana initiative to be on the [state] ballot" in 2016 or 2018, says Lockyer, who is now of counsel to Brown Rudnick in Orange County. Already, the Marijuana Policy Project has filed paperwork to qualify an initiative for next year's general election.

Four other states-Colorado, Washington, Alaska, and Oregon-have already approved legalization measures. If the nation's most populous state were to join them, it would be the biggest coup yet for the cannabis industry. And 55 percent of California voters favored legalization, according to a December 2013 Field Poll, marking the first time a majority of the electorate supported the move.

In addition to boosting tax revenue for cash-strapped local governments, broader legalization also could bring investment opportunities. Although investors have largely stayed on the sidelines of the marijuana industry, Founders Fund, a heavyweight venture capital firm based in San Francisco, recently announced it would take part in a multimillion-dollar financing round for Privateer Holdings, a cannabis-focused private equity firm. Privateer's ventures include Leafly, a review site known as "Yelp for cannabis"; Tilray, a Canadian marijuana-by-mail company; and Marley Natural, a partnership with the family of the late reggae legend Bob Marley to offer "heirloom" marijuana strains and accessories. Privateer's investments are "professionalizing the cannabis business landscape through the power of private enterprise," its website states, touting the experience of its team, which includes "Ivy League MBAs ... and even former federal law enforcement professionals."

Whether marijuana distribution gets regulated by the Legislature, a ballot initiative, or, effectively, by the demands of the capital markets, attorney Elford predicts, "we've got more years to come" before it's addressed statewide. "It's very difficult for the Legislature to be able to anticipate what issues will arise."

In the courts, Los Angeles's Prop. D faces ongoing legal challenges: two suits brought by 30 dispensaries and individuals. (Safe Life Caregivers v. City of Los Angeles, No. BC521581 (L.A. Super. Ct. filed Sept. 16, 2013), and Pain Free Society of Calif. v. City of Los Angeles, No. BC536870 (L.A. Super. Ct. filed Feb. 20, 2014).)

As for Nestdrop, Arthur Hodge is no longer the mobile app company's attorney, but he believes it may be able to get Judge O'Brien's preliminary injunction overturned. "The plain reading [of Prop. D] is it clearly allows [medical marijuana] delivery," he says. Nestdrop filed a notice of appeal in February (People v. Nestdrop, No. B262174 (Cal. Ct. App. filed Feb. 23, 2015)), and recently it launched an online crowdfunding campaign to underwrite its legal fight.

On its website, a map of Nestdrop's coverage area continues to include the city of Los Angeles. But some competition could be on the way. In San Francisco, a startup called Eaze-which advertises itself as "the Uber of pot"-enlists "caregivers" to make deliveries in unmarked cars. In its first two weeks of operation last July, its drivers serviced 500 patients.

Eaze CEO and founder Keith McCarty is quick to draw a distinction. "We're not a delivery service," he told the San Francisco Chronicle last year. "We're the technology that automates connections between patients and dispensers."

With $1.5 million in seed money raised by November, McCarty reportedly has plans to deliver medical marijuana by drones. Eaze claims it now serves more than 30 Bay Area cities.


The Struggle in Small Cities

More than 100 miles east of Los Angeles lie the Coachella Valley cities of Desert Hot Springs and Rancho Mirage. Both are clients of Steven Quintanilla, who says that as a result he has seen "all sides" of the medical marijuana controversy. The political challenge, Quintanilla says, is to forge some sort of consensus among different groups as to the benefits and drawbacks of medical marijuana. "The legal challenge is the issue of location [for dispensaries]," he says. "Where is the most appropriate place to put them in the community? Dispensaries are a new issue. They don't fit into the categories we're used to dealing with from a land-use perspective."

In cities where dispensaries are allowed to operate, they are subject to zoning restrictions designed, for example, to keep them away from schools, playgrounds, libraries, child care and youth facilities, parks, and churches. Of course, similar rules apply to adult nightclubs and liquor stores, but as Quintanilla points out, different considerations are involved when a business supplies a product whose users often may be too sick to travel to a retail outlet to obtain it.

In August 2010 Rancho Mirage city officials learned that a medical marijuana dispensary called Desert Heart Collective had opened for business in an office building in the center of town. At the time, the city of some 17,000 had no land-use regulations specifically governing dispensaries, and the city council decided to issue permits to two dispensaries on a first-come, first-served basis. So many applicants showed up at City Hall, Quintanilla recalls, "it was like they were lined up for a Rolling Stones concert." The permitting plan also raised an outcry, particularly in the business community. "They were not opposed to the idea of medical marijuana," Quintanilla explains. "They were opposed to the idea of a medical marijuana facility opening next door."

The business owners' discomfort about negative "secondary effects" reflected concerns that had become common in cities throughout the state since passage of the Compassionate Use Act in 1996. A 2009 report by the California Police Chiefs Association said robbers had attacked and murdered dispensary operators, adding that "[d]rug dealing, sales to minors, loitering, heavy vehicle and foot traffic in retail areas, increased noise, and robberies of customers just outside dispensaries are also common ancillary byproducts."

That same year, however, an internal Los Angeles Police Department report found that although 47 robberies took place at the city's 800 pot shops, the frequency was three times higher at banks, according to the Los Angeles Daily News. And dispensaries can generate positive effects for municipalities, such as tax revenue.

But in Rancho Mirage, city council members decided to skip all the hassle, according to Quintanilla. "They didn't want to deal with the land-use issues that came along with [medical marijuana]," he said. After enacting a series of moratoriums on new dispensaries, in March 2011 the city banned them all.

Rancho Mirage's ordinance does permit marijuana delivery services to operate within the city. "We wanted to show the community we are compassionate," Quintanilla explains. Weedmaps shows dozens of delivery-only operations now based in the Coachella Valley, including GreenPedal Delivery, Alien Plant Farms, and PSGreens. Residents who belong to medical pot clubs that don't deliver in Rancho Mirage are eligible for a $25-a-month stipend from the city for travel to their dispensary. ____________________________________________________________

Meanwhile, in Federal Court

Los Angeles City Attorney Mike Feuer isn't the only California prosecutor who has some medical marijuana advocates gnashing their teeth in frustration. In the Bay Area, Melinda Haag, U.S. Attorney for the Northern District of California, is continuing her efforts to crack down on dispensaries even though her boss, Attorney General Eric Holder, has directed prosecutors to focus on black-market traffickers-not marijuana businesses that are legal under state law.

Haag has brought civil forfeiture proceedings against Oakland's Harborside Health Center and the Berkeley Patients Group under 21 U.S.C. section 881(a)(7). (See United States v. Real Prop. & Improvements Located at 1840 Embarcadero, Oakland, Calif., No. 12-CV-3567 (N.D. Cal. filed July 9, 2012); United States v. Real Prop. & Improvements Located at 2366 San Pablo Ave., Berkeley, Calif., No. 13-CV-2027 (N.D Cal. filed May 2, 2013).)

Harborside is said to be one of the world's largest dispensaries-with sales of approximately $25 million a year, on which it pays city and state taxes. Haag alleges Harborside is in violation of federal law prohibiting the distribution, cultivation, and possession of marijuana (21 U.S.C. § § 841 and 856).

The prosecution hasn't gone down well in Washington, D.C., where three Californians in the House-Reps. Sam Farr (D-Salinas), Barbara Lee (D-Oakland), and Dana Rohrabacher (R-Huntington Beach)-in February accused Haag of "not acting within the spirit or letter of the law." The representatives had inserted into December's federal appropriations bill a provision that prevents the Department of Justice from spending money to prosecute dispensaries that abide by state laws. "We believe the DOJ has overstepped its bounds in the Harborside case," the representatives said in a statement.

Harborside also found an ally in the city of Oakland, which challenged the forfeiture action in its own suit under judicial review provisions of the Administrative Procedure Act (APA) (5 U.S.C. §§ 702, 706). City Attorney Barbara J. Parker alleged that attempting to seize assets impinges on Oakland's regulatory framework-developed to ensure that medical marijuana dispensaries comply with state law-and would threaten the health and safety of resident patients by cutting off their access to an established marijuana supplier.

The district court granted the Justice Department's motion to dismiss, holding that the APA does not authorize a collateral means of contesting forfeitures. Oakland appealed that ruling to the Ninth Circuit, and also obtained a temporary stay of Haag's forfeiture action. (See City of Oakland v. Holder, 961 F. Supp. 2d 1005 (N.D. Cal. 2013).)

During a recent hearing, Judge Stephen Murphy III-a district court judge on temporary assignment to the court of appeals from Detroit-questioned the government's tactics. "Why have you picked this fight? What's the end game here?" Murphy asked DOJ attorney Adam Jed. The judge noted that the forfeiture action appears to conflict with the administration's declared policy of "largely looking the other way in terms of medical marijuana facilities." Jed said he didn't know why Haag had gone to court, but he stressed that the Obama administration's policy statements weren't legally enforceable.

The panelists also appeared hostile to Oakland's attempt to intervene on behalf of the dispensary. "Go to Congress with that argument," Judge Richard Tallman advised Cedric C. Chao, the attorney representing the city.

In the Berkeley case, U.S. District Judge Jon S. Tigar denied the city's bid to block Haag's forfeiture action against the Patient's Group, but he has allowed the dispensary to stay open pending an appeal.

In his order, Judge Tigar wrote, "[T]he issues raised by medical marijuana in local or state jurisdictions that permit its use, and those jurisdictions' standing to assert their interests in medical marijuana regulation, present real, unanswered policy questions that are sufficiently 'serious' to warrant consideration by the Ninth Circuit." (See 2015 WL 525711 at *2.)

Matthew Heller is a California Lawyer contributing writer.


Donna Mallard

Daily Journal Staff Writer

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