Warning Shots Give a Sense of How Large the Black Market for Pot Remains

California (VOSD) – California pot regulators have stepped up their enforcement efforts. In recent weeks, they sent more than 1,240 cease-and-desist letters to unlicensed operators, according to the state’s Bureau of Cannabis Control, and the number is rising by the day.

So far, about 375 of those warning shots have been fired at San Diego-based operators.

Across California, about 2,500 entities are permitted to either grow, manufacture, distribute, test or sell marijuana. In San Diego, there are currently 12 licensed dispensaries selling medical and recreational products, nine distributors and three testing labs — all of which serve a population of 1.4 million.

The gap between the number of enforcement letters and the number of licenses — 375 warnings compared to 24 legal operators — suggests the black market still has a significant foothold in San Diego and beyond, and signals the continued difficulty of policing the marketplace.

Lt. Thomas Seiver of the San Diego County Sheriff’s Department said he’s appreciative of the state’s work but skeptical it’ll amount to much. Dispensaries are opening quicker than deputies can shut them down, despite marijuana commerce remaining illegal in unincorporated areas.

For months, the county has been issuing its own cease-and-desist letters and personally reaching out to property owners without much luck. Most of the illegal operators are not deterred by California’s threat to bar them permanently from the state’s licensing system because they never intended to get into the industry properly, Seiver said.

The state also requires marijuana advertisers post their state-issued license online, but that, too, has a kind of self-defeating logic to it, Seiver conceded.

“It’s like having a lock on the door,” he said. “That’s just to keep the honest people out.”

The most high-profile target of California’s enforcement campaign is the Irvine-based Weedmaps, which connects buyers and sellers of marijuana through its website. Last month, California pot czar Lori Ajax sent the company a letter asking its executives to remove advertisements posted by unpermitted operators.

Weedmaps has argued that that San Diego and other cities are creating well-meaning but unrealistically small marketplaces that cannot meet local demand. The company made the same point in its response to Ajax.

On Monday, CEO Doug Francis and president Chris Beals cited “a widespread failure of local governments willing to provide a path to licensure for thousands of cannabis businesses who have operated in California for 20 years. Nearly 85 percent of California cities and counties do not permit licensure for cannabis business operators.”

Throughout San Diego County, only a few cities allow some form of marijuana commerce, although the list is growing. Some cities, like Oceanside, are moving forward with a medical ordinance while others, like Escondido, are doubling down on prohibition.

Weedmaps is defending itself by citing federal communications exemptions enjoyed by similar sites like Yelp and Craigslist — which shift liability onto the third parties who upload information — and by questioning the authority of state regulators. As heads of a technology company, Francis and Beals argue, they do not need a marijuana license to host marijuana sellers; they are, therefore, exempt from the California Bureau of Cannabis Control’s purview.

They promised to keep working with the state but said a lack of detail on the bureau’s own website made filtering legal from illegal operators difficult. They also said the company’s terms of use and listing agreements require that operators follow the law.

Unless one side radically alters its position, the standoff seems headed to court. On its surface, the dueling memos represent a narrow legal dispute between one company and one government agency. But it is also a proxy for a larger war that’s being waged in city halls across the state, as once-friendly activists and entrepreneurs are forced to compete for limited market share.

Ajax has the support — however tepid — not only of law enforcement but some influential players in the legal marijuana industry.

For instance, Joe Gerlach, founder of the Oakland-based edible maker Korova, sent an email to other industry members last week in which he cheered on Ajax and strategized ways to increase the pressure on Weedmaps. He blamed the company for giving illegal operators a means to undercut the legal market and called for an immediate injunction and daily fines.

Korova specializes in high-potency products and so it has been hurt by the state’s decision to limit legal levels of THC.

“It’s already tough out there, on all of us, with all the new regulations and taxes,” Gerlach wrote. “The issue needs to dealt with in a timely manner.”

George Fahouris, a marijuana consultant and president of DigiGriot in La Mesa, agrees. He’s been advocating for more licenses and for better medical patient access — something that Weedmaps can provide. But he thinks Gerlach was right to suggest the system as it stands is broken.

“It’s tough,” Fahouris said. “We’re a free-market society and when you try to regulate something on such a tight time span, it’s going to cause havoc.”

It’s also not likely to change anytime soon. Last month, Chula Vista became the second city in the region to approve rules for recreational marijuana sellers, beginning January 2019. And that’s assuming voters OK a funding mechanism in November.

For months, local activists have been wondering aloud how many of transactions on any given day stem from the black market. Some in Fahouris’ circle would put the figure at about 50 percent. He thinks it’s higher.

This article was prepared by Jesse Marx for Voice of San Diego.