6 August 2026
Cannabis Industry Jnl
An Orange County Superior Court judge has ordered California’s Department of Cannabis Control to take steps to bring the state’s cannabis track-and-trace system into compliance with California law, concluding that the system does not currently flag irregular transactions for investigation.
The August 4, 2026, final judgment in HNHPC Inc. v. Department of Cannabis Control represents the latest development in nearly five years of litigation brought by HNHPC, the parent company of California cannabis retailer Catalyst. Jeff Augustini, the attorney who represented HNHPC, said the ruling confirms that the DCC has failed for more than eight years to fulfill its statutory duty to design and implement a compliant tracking system.
The decision follows an earlier ruling from California’s Fourth District Court of Appeal, which revived HNHPC’s case after a lower court had dismissed it. The appellate court held that the existence of contracts to develop a track-and-trace system did not establish that the DCC had actually fulfilled its legal obligation to create a database capable of flagging irregularities.
A system that collects data—but does not flag problems
California Business and Professions Code Section 26067 requires the DCC to establish a track-and-trace program covering the movement of cannabis and cannabis products through the licensed supply chain. The statute also requires the department’s electronic database to be designed to “flag irregularities” for investigation.
According to the judgment summary provided by Augustini, Judge Lee Gabriel found that the DCC’s current system—operated through the state’s California Cannabis Track-and-Trace program, commonly known as METRC—does not satisfy that requirement.
The court reportedly found that the system generates large volumes of reports and raw transaction data, but does not automatically identify potentially irregular activity using objective criteria. Instead, DCC analysts are manually reviewing the data without established definitions explaining what constitutes an irregular transaction.
All annual and provisional California cannabis licensees are required to use the state’s CCTT–METRC system to record inventory and product movement, regardless of whether a local jurisdiction uses another tracking platform.
Industry reaction
Hirsh Jain, a respected cannabis industry analyst, called the ruling “one of the most consequential cannabis regulatory decisions California has seen in years.” Jain said the judgment is significant not simply because Catalyst prevailed, but because it concludes that the DCC failed to implement the track-and-trace system California law requires.
He argued that the findings lend credibility to longstanding operator concerns that METRC imposes substantial compliance costs—including tagging, data entry, inventory reconciliation, employee training, audits and correction of reporting errors—without effectively identifying diversion or meaningfully disrupting the illicit market.
“If the system is not effectively identifying suspicious transactions or reducing diversion,” Jain said, “then it is imposing a significant compliance tax on the legal industry without delivering the public benefits that were used to justify those costs.”
Jain also said the implications could extend beyond California. Because METRC is used in numerous state cannabis markets, he expects policymakers elsewhere to question whether they are paying for systems that deliver the public benefits they promise. The decision could ultimately be cited in future litigation, legislative hearings and regulatory reform efforts in other METRC states.
The “burner distributor” problem
HNHPC’s lawsuit arose from allegations that certain intermediary distribution businesses—often described as “burner distributors”—were being used to move licensed cannabis into the illicit market. The company argued that inadequate monitoring allowed large volumes of product to be diverted and enabled the evasion of state taxes and cannabis regulations.
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California Court Orders DCC to Overhaul Cannabis Track-and-Trace System
