Nice guys are done with finishing last—at least that was the sentiment shared by Elliot Lewis of Catalyst Cannabis Co when he raised deposition requests against officials in California over the topic of “Burner Distribution.”
Lewis’s lawsuit is leveled against officials who have overseen a track-and-trace system that determines who in California can distribute marijuana. According to Lewis’ charge, the state has quietly allowed for bad actors to interfere in compliant business and lower margins for everyone.
The problem is that this interference isn’t recent news. “Burner distribution” has been an open secret in the cannabis industry for years—something California lawmakers have been suspiciously silent on since cannabis was first legalized for adult consumption in 2018. The changes brought up in this lawsuit only bring the problem into the open.
What Is Burner Distribution?
The burner distribution concept is the same as with a burner cell phone: a company purchases a distribution license for the purpose of operating discreetly. These licenses are purchased by “front men” who obscure the true ownership of the license. When the company has completed its work, they will dump the license with no strings attached.
The natural question becomes why these licenses are procured just to be dumped. The answer has to do with the tough nature of California’s compliant market, and how in a race to the bottom, everyone loses.
Why Burner Distribution is a Problem
A compliant farmer will sell to an accredited wholesaler/distributor, who will then work with licensed dispensaries to sell their product to customers. Sadly, taxes and fees become introduced at every level of this arrangement, and margins are slimmer. By the time the product reaches the customer’s hands, the highest retail net income may be only 1%-5% of gross income. For business owners, that is not a lot.
However, with illegal distribution, individuals have access to more significant margins of income, newer markets, and less competition. The tradeoff is that these individuals are then operating illegally and will then risk legal consequences if caught.
Similar to how people are pushed to extraordinary ends to provide for their families, so too are businesses turning to the illegal market to recoup costs while their business suffers under a competitive and tax-laden market.
By purchasing a burner distribution license, you have the opportunity to purchase cannabis wholesale and sell to an illegal market either in-state or across prohibition lines. If the license is far enough obscured from your company, it will be difficult for anyone to trace the agreement back to you, leaving your hands clean with money in your pocket.
For businesses pushed to the brink of bankruptcy, burner distribution has become a standard operating procedure for turning a profit in a tight market. The problem is that compliant business and those who play by the rules (like CEO Elliot Lewis) are finally putting their foot down.
The deposition request demands answers for state passivity in the face of this open secret.
How is the State Responding?
While the preliminary hearing won’t be until February 14th, 2022, blows are already flying between Lewis’ legal team and the Attorney General’s office. Since the case is founded on criminal actors, it is difficult to state the issue without bringing ambiguity into the formula directly. In mid-November, the original claim was replaced with an amended lawsuit, with more changes expected to come.
Thirty-one topics surrounding burner distribution are expected to be explored by at least one state expert, with twenty categories of documents to fill. The robustness of the case speaks to the gravity that legal producers feel in the face of blatant systemic corruption.
The people are done waiting. They want answers, and they want solutions as to how any legal producers are supposed to compete in a market that protects the efforts of criminals in its present state.
Of course, the discussion of what has led to burner distribution would not be complete without understanding the challenges legal producers and retailers face. For more on California licensing, check out our article here and be sure to follow our social media and newsletter for up-to-the-minute cannabis news.