California shipped an estimated 9 million pounds of cannabis into interstate commerce in 2024, and it’s unclear how much of that illicit product was produced by licensed operators. Regardless, the state’s regulators aren’t taking the blame.
The California Department of Cannabis Control (DCC) filed a notice of appeal on Sept. 23, signaling that it plans to challenge the Orange County Superior Court’s finding last month that the department “failed its ministerial duty” to design and implement a track-and-trace system that flags irregularities to investigate, as mandated by the state’s Business and Professions Code under Section 26067(b)(2).
State law requires the DCC to consult with the California Department of Tax and Fee Administration and create an electronic system containing shipping manifests under its track-and-trace program. The department maintains that it complies with its mandate through Metrc, the state’s seed-to-sale software system provider.
The DCC’s appeal comes after Orange County Superior Court Judge Lee Gabriel ruled in favor of HNHPC Inc. (a Santa Ana-based retailer d/b/a Catalyst) on Aug. 4. The judge found that the DCC’s reliance on analysts to review reports of extracted raw data from the track-and-trace system does not sufficiently meet statutory requirements.
Gabriel ordered the DCC to establish objective criteria within six months to define “irregularity” and implement a system that can properly flag suspicious activity within the track-and-trace system, ruling that the current report-based system fails to do so as required.
“The DCC’s compliance report shall include a detailed description and explanation of the objective criteria and definitions used in each report to define or establish when the data contained therein is deemed by the DCC to be an irregularity, the frequency (if a standard report) and/or the circumstances (if an ad hoc or queried report) under which each report is run and reviewed, and the procedures it has implemented to ensure irregularities flagged by the reports are forwarded to DCC staff for review and investigation,” the judge wrote.
This legal battle stems from 2021, when Catalyst, represented by the Law Office of Jeff Augustini, sued the DCC, claiming the department and the state “made the purposeful decision” to turn a blind eye to illegal “burner distros” so that California could continue to benefit from cultivation tax money.
Catalyst argues in the lawsuit that holes in the track-and-trace system led to an “exponential rise” of burner distributors who conceal and launder state-grown cannabis for delivery to unlicensed dispensaries and unregulated markets. The lawsuit paints a picture of “bad actors” legally buying cannabis in Metrc and then evading paying downstream taxes by diverting it out of the licensed supply chain, calling it the “worst kept secret” in the industry.
“Operators (usually legal cannabis operators) purchase or obtain distribution licenses in various local jurisdictions, often where cultivation operations are prevalent and/or where such licenses are relatively easy and/or cheap to obtain or acquire,” the 2021 lawsuit states. “Often, an operator will procure multiple local licenses by using an array of different ‘front men’ who agree to attach their names to the licenses (which is significant, as the state’s lack of enforcement has made acting as a straw man for a burner distro an incredibly high yield, low risk endeavor). Once licensed, the burner distros then purchase large quantities of cannabis from cultivators within the state. In connection with those purchases, the burner distros (which by law are responsible for collecting and paying all legally mandated cultivation and excise taxes) may or may not pay the ‘cultivation tax’ to the state.
“Once the cannabis reaches the burner distros, however, the DCC effectively ceases regulating or even monitoring what happens to that cannabis, and instead relies heavily, if not exclusively, on tips or complaints to instigate investigations or enforcement proceedings against illegal operators.”
In August 2023, after a trial court initially dismissed the lawsuit, California’s Fourth Appellate District ruled that the DCC did not prove it fulfilled its statutory obligations to flag irregularities, overturning the dismissal and returning the case to the lower court for trial.
In August 2026, when Gabriel ruled in favor of Catalyst, Augustini questioned why, over the course of the five-year dispute, the DCC hadn’t voluntarily attempted to settle the matter by beefing up the state’s track-and-trace system. The plaintiff’s attorney also predicted that DCC would appeal Gabriel’s ruling.
At the time, DCC spokesperson Jordan Traverso told SFGate that the department was looking forward to strengthening its tracking system, “which has already driven a significant surge in compliance and enforcement actions.”
When the department filed its appeal notice on Sept. 23, Augustini accused the DCC of supporting the illicit activity.
“While the DCC of course is legally entitled to appeal, the practical (and intended) effect of its decision is that, at least for the next 12-18 months (while its appeal is pending and for some period thereafter), it will refuse (as it has for the past eight years) to take any of the actions needed to actually carry out its core statutory function of controlling the flow of cannabis to/from the illicit market,” the attorney said. “That function is in its name – to control cannabis.”
