MMJ Daily
Jeff Augustini, the attorney who represented HNHPC, says 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. California Business and Professions Code Section 26067 requires the DCC to establish a track-and-trace program and to design its electronic database to flag irregularities for investigation. Judge Lee Gabriel found that the state’s California Cannabis Track-and-Trace program, commonly known as METRC, does not satisfy that requirement. The court found the system generates large volumes of reports and raw transaction data but does not automatically identify potentially irregular activity using objective criteria, with DCC analysts instead manually reviewing data without established definitions of what constitutes an irregular transaction.
The ruling follows a 2023 California Fourth District Court of Appeal decision that revived HNHPC’s case after a lower court dismissed it. The appellate court held that contracts to develop a track-and-trace system did not establish that the DCC had actually fulfilled its legal obligation.
Hirsh Jain, a cannabis industry analyst, calls the ruling “one of the most consequential cannabis regulatory decisions California has seen in years.” Jain says the judgment lends credibility to longstanding operator concerns that METRC imposes substantial compliance costs, including tagging, data entry, inventory reconciliation, employee training, and audits, without effectively identifying diversion or 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 says the implications could extend beyond California, as METRC operates in numerous state cannabis markets, and he expects policymakers elsewhere to question whether they are paying for systems that deliver promised public benefits.
Under the order, the DCC has six months to establish objective criteria defining an irregularity, enabling the system to detect and flag suspicious transactions without requiring manual review. The order does not require California to replace METRC, but requires the DCC to configure or supplement the existing system to perform the flagging function mandated by statute. Augustini has predicted the DCC could appeal and resist meaningful implementation, potentially prolonging the dispute by another one to two years. A state-commissioned study by ERA Economics found that unregulated channels supply about 2.4 million of the 3.8 million pounds of cannabis consumed locally, with the illicit market commanding roughly 60% of total state consumption.
