Cannabis Regulation in the Wild West: What We Can Learn From San Jose
How tough is it for cities to craft workable dispensary regulations? Consider the conundrum in San Jose, California.
The de facto capital of Silicon Valley struggled for years to create a system to regulate medical cannabis within its borders. Now, after exhaustive negotiations among local officials, industry representatives, and members of the public, the city finally has one in place. It requires stringent product testing and police inspections, establishes a strict vertical-integration system unlike anywhere else in the state, and limits the city to 16 total dispensaries.
And in less than a month, it could all come crashing down.
Measure C, a city ballot initiative set for June 7, would undo the hard work that dispensary operators and local lawmakers have put into building a workable system in a state where the Legislature has historically offered little guidance to municipalities. Critics of the current regulations complain the system shortchanges the needs of patients. After all, they say, San Jose’s 1 million citizens make up America’s tenth largest city. Denver has two-thirds the population and 25 times the number of shops. Measure C would address that by allowing a virtually unlimited number of dispensaries in most parts of the city.
San Jose could have banned dispensaries altogether, but it didn’t. Instead, city officials created regulations meant to shield dispensaries from the federal raids that have plagued access points in other municipalities.
“There’s no doubt that just banning it was by far the easiest way to deal with the issue,” former San Jose Mayor Chuck Reed said in a recent interview with Leafly. “Most cities say, ‘We’ll just wait for the state to figure it out, and we’ll ban it in the meantime.’” That’s exactly what happened throughout most of Silicon Valley.
Consider this: For the majority of the two decades that medical marijuana has been tolerated in California, nobody knew for sure whether storefront dispensaries were even legal. State law said only that patients could associate “collectively or cooperatively,” not that they could give money to a store employee in exchange for products made by yet another business. It was a matter left to the courts, and judges had a broad range of interpretations.
Facing the threat of lawsuits as well as the looming watch of federal authorities, who would eventually launch a coordinated crackdown on the state’s cannabis businesses and end up shuttering hundreds, cities across the state threw up their hands and enacted bans on dispensaries. Some ordinances were successfully challenged, but most stuck.
In San Jose, the City Council voted multiple times on a ban, but it never had the numbers to adopt one. In the meantime, storefront dispensaries multiplied. Beginning in 2011, city officials pushed various ordinances to cap the number of shops, but for years they failed. “We struggled,” Reed said. “We struggled and struggled.” An estimated 120 dispensaries operated across the city at one point, all in a legal gray area.
“Six, seven years ago, we were really behind,” Greg Brodick, who manages Haze dispensary in San Jose, said of the city’s situation. “It was just a free-for-all.”
Finally, in 2014, Reed’s final year as mayor, he and others at City Hall wrangled an ordinance past the finish line. By today’s standards, it was a bit of an odd duck. It required every registered dispensary to be vertically integrated — in other words, every shop had to grow their own flower, infuse their own edibles, extract their own concentrates, and so on. Pretty much everything needed to be done in-house.
Reed, a practicing lawyer, said the unusual design of the regulatory scheme was driven by guidance from the U.S. Department of Justice, which had issued a memo aimed at clarifying federal enforcement efforts in states that had legalized medical cannabis. Both the city and dispensary operators had a stake in “keeping the federal government out of our business,” he said.
“Remember, we’re dealing with the federal government. You’ve got to control this stuff all the way through the process,” Reed explained. “The best way to control it is to have a vertically integrated system.”
The new law did more than just set up strict vertical integration. It also set rules for zoning and inspections, an effort to demonstrate to the feds a “strong and effective regulatory system,” Reed said. Perhaps most important, it set a cap on dispensaries: Today, only 16 storefronts operate with the city’s blessing.
Those 16 dispensaries have scrambled to come into compliance with some of the most onerous local regulatory schemes in legal cannabis. They’ve courted investors for millions of dollars and engaged in elaborate construction projects to house commercial kitchens and extraction equipment.
They did so somewhat begrudgingly. “There’s not a single industry in the world that requires retail business to manufacture all their products,” said Brodick at Haze. “What they tried to do was remove vendors entirely.” If you had a favorite chocolate bar available elsewhere in the state, San Jose’s ordinance meant it couldn’t be sold in the city — not legally, at least.
One of the dispensaries that struggled hardest to follow the new rules was Airfield Supply Co. Marc Matulich, who founded the collective in 2010, said it’s cost about $2.9 million to bring the storefront into compliance.
“We had to find a building that was, at a minimum, 20,000 square feet,” he said. “All the zoning stuff limited available real estate to maybe about 1 percent of the city, and with all the landlords to deal with, there were only a handful of properties that would work.”
Airfield found a building and, in December 2014, won zoning approval from the city. The vertical-integration deadline was set to take effect the coming July. “They basically gave us seven months to do a complete gut and remodel and try to be fully vertically compliant.”
In the meantime, the city worked to slowly shutter the unregistered dispensaries. Reed, despite no longer being mayor, has worked to protect his hard-won regulations, and he keeps close tabs on developments. Today, he estimates the city has just a dozen or so illegal businesses, including both storefronts and delivery services.
“Looking back on it, I think it was worth the effort,” Reed said, “because now we have a system that’s in place and will serve us well.”
Well, unless it doesn’t.
Critics of Reed’s elaborate regulatory scheme say its 16-dispensary ceiling fails to offer patients adequate access to medicine. Attorney James Anthony, the lead proponent of Measure C, said in his official argument for the measure that San Jose should have at least as many shops as Denver, a smaller city, which counts upward of 400.
Measure C, which voters will weigh in on come June 7, would lift the current cap. It would also undo zoning rules, allowing dispensaries to locate more freely across the city — “including near public schools,” warns the local Mercury News editorial board in its argument against the measure.
Anthony didn’t respond to phone and email messages seeking comment, but he told San Jose Inside that Measure C’s passage would mean the currently registered dispensaries “would compete in a more competitive market against mom-and-pop dispensaries.”
“They’ve become part of the establishment,” he said. Anthony also told the paper, “I don’t think any of them would be too brokenhearted if Measure C does pass.”
UPDATE: The day this article was published, James Anthony announced that he now opposes his own campaign. “We won that battle,” he said, according to San Jose Inside. “Measure C has been wildly successful already. It gave us the political power and leverage to get City Hall to cooperate. I think that when you win, then you move on to the next battle.”
That’s a position some of the registered dispensaries take issue with. Matulich, at Airfield, called Measure C “a threat to medical cannabis access within our city.” Deregulating the market, he said, “invites federal intervention.”
“Right now our medicine is tested,” he continued. “We’re inspected by the police department. There’s a lot of checks and balances.
"If Measure C passes, we will lose a lot of that compliance and oversight, which in the end is bad for patients because there will be less accountability.”
Skeptics counter that the licensed dispensaries stand to profit from the exclusive arrangement, but Brodick, at Haze, said the existing regulations are about more than the number of dispensaries in town. The strict standards are also an opportunity to show observers in San Jose and around the country that cannabis can be a legitimate industry and finally shed its longtime stigma. “When it eventually does go recreational in California,” he said, “I want it to be a positive thing, not a negative thing.”
Brodick and others also pointed out that while San Jose’s 16 dispensaries might seem scant compared to the 400-plus in Denver, the city of Oakland, Calif. — roughly half San Jose’s population — currently caps its number of dispensaries at eight. And even that didn’t manage to help dodge the hammer of federal authorities: Oakland and its largest dispensary only last week managed to escape a four-year legal attack by U.S. Attorney Melinda Haag.
Here’s what might be the most interesting part of the whole story: As the situation on the ground has changed, cities like Oakland and San Jose have revised their local ordinances. Oakland this month moved to raise its dispensary cap, allowing up to eight more shops per year as well as delivery services in a bid to become the cannabis capital of California.
San Jose is also showing signs of compromise, and that has business owners like Matulich optimistic. “Now that we’ve come into compliance, there’s an open dialogue” with the city, he said. “It’s a joint effort to improve the system.”
Brodick noted how many other cities have opted to enact bans rather than work with dispensaries. “Cities like Oakland, San Francisco, San Jose, Santa Cruz — people should feel very lucky that these towns have even accepted this,” he said. “We’re all still just learning what’s going to work and what’s not going to work. I give kudos to the city of San Jose for allowing this to happen.”
San Jose has already been responsive to registered dispensaries’ concerns over tight deadlines for complying with vertical-integration requirements. And Reed, who’s still keeping watch over his regulations, said those requirements will likely ease now that state lawmakers have finally passed more comprehensive laws around medical cannabis, establishing a complicated system of licenses and other mandates. The changes allow cities such as San Jose to keep their existing regulations, but Reed said the fact a statewide system will finally exist means local laws can be revised more freely without fear of federal intervention.
And if California passes an adult-use legalization measure this fall? “There’s always been a potential ballot measure on recreational use waiting in the wings. That was part of our thinking in doing this,” said Reed, more a pragmatist than a friend of cannabis. “If the state decides in November that you don’t need a medical recommendation to use marijuana, I think our system will work fine.”
Until clarification from state lawmakers finally came, California was widely seen as the Wild West of cannabis. While it was the first state to legalize, it’s also emerged as the most chaotic. San Jose, lacking guidance, tried to plot its own course. But the severity of its early regulations are now fueling a backlash that could undo the whole system.
Reed said he stands by the years of effort, regardless of what happens in coming months. “I think it was the right thing to do,” he said.
Matulich, an outspoken critic of the city’s early efforts to rein in dispensaries, now agrees with his former rival. “Nothing’s ever perfect the first time around,” he said. “I guess a part of the message is, it’s in everyone’s best interest to start with something, even though it’s not perfect.”