California Cannabis Law:  Vertical Integration Under MMRSA, MCRSA, and MAUCRSA

The Medical Marijuana Regulation and Safety Act (MMRSA) established the Bureau of Medical Marijuana Regulation and created California’s system for licensing medicinal marijuana businesses.  The law was later modified via several smaller bills and re-named the Medical Cannabis Regulation and Safety Act (MCRSA).  Following the legalization of recreational marijuana, California combined the medicinal and recreational business licensing structures via the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA).

Entrepreneurs looking to operate a for-profit medical marijuana business in the state must obtain the appropriate license, geared toward the specific medium for the business (cultivation, manufacturing, testing, distribution, etc.).  Many marijuana business owners hope to operate at multiple levels of the supply chain by, for example, growing and distributing their own marijuana products.  There are specific rules and complex licensing requirements to run a marijuana business operating at multiple levels in the distribution process. 

At McReynolds Vardanyan, our cannabis business law team has a deep knowledge of MCRSA, MAUCRSA, and all other cannabis industry laws and regulations.  We are well-versed in all areas of cannabis law and business.  We are experienced practitioners of cannabis law as well as business and corporate law, and we know our way around a courtroom.  We will help you structure your cannabis business to be as effective, efficient, and profitable as possible, all while adhering to the relevant regulatory mandates.

What is Vertical Integration?

Vertical integration refers to the practice of having one business operate at two or more stages of production.  Often, this involves the merger of multiple companies at different stages of production into one umbrella company.  For example, an auto manufacturer might acquire an automotive dealership, thus integrating the manufacturing and distribution levels of production.  Combining multiple stages of production into one company serves to reduce redundancies, lower costs, and otherwise promote efficiencies within the vertically-integrated company.

Vertical integration may seem purely business-oriented and efficient at first blush, but issues can arise.  Federal and state antitrust regulations moderate vertical integration in some industries because of the potential for anticompetitive abuse.  For example, if there are limited internet service providers (ISP) in a given location, and one of those ISPs acquires a company that distributes content such as videos, there is a concern that the ISP could abuse its control as an ISP by limiting internet service to competitors of its video distribution business.

The marijuana industry has its own concerns regarding vertical integration.  While larger entities tend to believe vertical integration will reduce the cost to customers, smaller dispensaries are worried that allowing vertical integration will allow bigger retailers to muscle them out of business.  Some anti-vertical integration laws in the marijuana industry harken back to pre-prohibition days when alcohol manufacturers engaged in shady business dealings with bars and encouraged unhealthy over-consumption.  Each state has its own rules concerning vertical integration in the cannabis industry.

Vertical Integration Limited Under MCRSA/MMRSA

Under MCRSA, businesses could apply for 17 different types of commercial licenses to medical marijuana companies.  Under MAUCRSA, which combined the medicinal and recreational cannabis licensing systems, there are now at least 20 license types.  Each license is geared toward a specific stage of production, further delineated by the magnitude of the operation and certain other factors.  For example, there are 14 different cultivation licenses that vary based on the size of the operation, whether the cultivation site is indoor or outdoor, and the type of light source used.  There are other licenses for testing, transportation, distribution, and manufacturing products.

A business seeking to operate at multiple stages of production must hold all of the appropriate licenses.  As a general rule, MCRSA only allowed licensees to hold licenses in up to two separate license categories.  Under the blanket rule, therefore, a business could not cultivate, test, and distribute its own product, because that would require three separate licenses.  There were also restrictions on the combination of licenses a given licensee might hold as well.

Vertical Integration Under MAUCRSA

MAUCRSA, effective January 1, 2018, revamped California’s marijuana licensing structure by combining the medicinal and non-medicinal licensing structures.  MAUCRSA revised a number of provisions in place under MCRSA.  Among other things, MAUCRSA repealed the previous restrictions on vertical integration, allowing a single licensee to own multiple licenses.  Certain restrictions remain, however.

While a single individual can now hold more than two licenses, they must operate as separate and distinct businesses.  Additionally, certain combinations are still not allowed.  Testing operations may not have any other type of license, for example.  Nor can a large-scale grower own a distributor license or a micro-business license.  Moreover, vertical integration is still subject to local city and county ordinance.

Experienced and Knowledgeable Marijuana Business Attorneys

If you are looking to start a marijuana business in California, or if you have questions concerning cannabis regulatory issues in Los Angeles or Southern California, call McReynolds Vardanyan, LLP, in Glendale at 818-855-2115.  Our California marijuana business attorneys are available 24/7 and are ready to help you protect your budding business and make sure it stays efficient, effective, and legally sound.