As licensed commercial cannabis businesses in the State of California continue to struggle, in part because of the continuously proliferating illegal market, Assembly Bill No. 2728 (“AB 2728”) seeks to increase the civil penalties associated with illegal, unlicensed commercial cannabis activity within the State.
Existing California Regulations
Under existing law, a person engaging in commercial cannabis activity without a license from the Department of Cannabis Control, is subject to a civil penalty of up to three (3) times the amount of the license fee for each violation. Additionally, each day of unlicensed operation constitutes a separate violation. With license fees of ranging from $200.00 to $300,000.00 depending on the type of license at issue, extremely civil high penalty assessments are possible under current law. However, given the current state of things, perhaps they are not high enough to deter illegal operations from popping up around the State.
What AB 2728 Would Change
If signed into law, AB 2728 would increase the civil penalty amount to four (4) times the amount of the license fee. Additionally, AB 2728 would require the Department of Cannabis Control to waive the penalty if the unlicensed person, within ten (10) business days of the issuance of the civil penalty, submits a payment to the DCC equal to the original license fee that the person failed to obtain prior to conducting the commercial cannabis activity at issue.
In practice, AB 2728 calls for the amendment of Business and Professions Code section 26038, which is existing law. The text of AB 2728, as currently proposed, is shown below.
THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:
SECTION 1.
Section 26038 of the Business and Professions Code is amended to read:
26038.
(a) (1) (A) A person engaging in commercial cannabis activity without a license as required by this division shall be subject to civil penalties of up to
threefour times the amount of the license fee for each violation. Each day of operation shall constitute a separate violation of this section.
(B)In addition to the penalties in paragraph (A), a person engaging in commercial cannabis activity without a license as required by this division that involves the following cannabis products shall be subject to the following civil penalties:
(i)For cannabis operations with more than 6 plants but fewer than 200 plants:
(I)A fine not exceeding one thousand dollars ($1,000) for a first violation.
(II)A fine not exceeding one thousand five hundred ($1,500) for a second violation within one year of the first violation.
(III)A fine not exceeding three thousand dollars ($3,000) for each additional violation within one year of the first violation.
(ii)For cannabis operations with more than 200 plants:
(I)A fine not exceeding three thousand dollars ($3,000) for a first violation.
(II)A fine not exceeding six thousand dollars ($6,000) for a second violation within one year of the first violation.
(III)A fine not exceeding ten thousand dollars ($10,000) for each additional violation within one year of the first violation.
(iii)A fine not exceeding fifty dollars ($50) per package of cannabis product.
(iv)A fine not exceeding fifty dollars ($50) per gram of cannabis concentrate.
(v)A fine not exceeding fifty dollars ($50) per pound of cannabis biomass.
(vi)A fine not exceeding two hundred fifty dollars ($250) per pound of cannabis flower.(B) The department shall waive all unpaid penalties accrued by a person under subparagraph (A) if, within 10 business days of issuance of the penalty, the person submits a payment equal to the original licensing fee required by the department pursuant to Section 26180 and all accompanying documentation.
(2) A person aiding and abetting unlicensed commercial cannabis activity shall be subject to civil penalties of up to three times the amount of the license fee for each violation, but in no case shall the penalty exceed thirty thousand dollars ($30,000) for each violation. Each day of operation of unlicensed commercial cannabis activity that a person is found to have aided and abetted shall constitute a separate violation of this section.
(3) In assessing a penalty, a court shall give due consideration to the appropriateness of the amount of the civil penalty with respect to factors the court determines to be relevant, including the following:
(A) The gravity of the violation by the licensee or person.
(B) The good faith of the licensee or person.
(C) The licensee’s or person’s history of previous violations.
(D) Whether, and to what extent, the licensee or person profited from the unlicensed cannabis activity.
(4) Cannabis associated with a violation described in this subdivision may be destroyed in accordance with Section 11479 of the Health and Safety Code. The person in violation shall be responsible for the cost of the destruction of cannabis associated with their violation.
(b) An action for civil penalties brought against a person pursuant to this division shall not be commenced unless the action is filed within three years from the date of the violation.
(c) All civil penalties imposed and collected pursuant to this section by a court shall be deposited into the General Fund except as provided in subdivision (e).
(d) For the purposes of this section, in order to prove that a person aided and abetted an unlicensed cannabis activity all of the following must be demonstrated:
(1) The person was an owner, officer, controlling shareholder, or in a similar position of authority allowing them to make command or control decisions regarding the operations and management of the unlicensed cannabis activity or the property in which the activity is taking place.
(2) The person had actual knowledge that the cannabis activity was unlicensed and that the cannabis activity required a license.
(3) The person provided substantial assistance or encouragement to the unlicensed cannabis activity.
(4) The person’s conduct was a substantial factor in furthering the unlicensed cannabis activity.
(e) (1) If an action for civil penalties is brought against a person pursuant to this division by the Attorney General on behalf of the people or on behalf of the department or a participating agency, the penalty shall first be used to reimburse the Attorney General and the department or the participating agency for the costs of investigating and prosecuting the action, including expert fees and reasonable attorney’s fees, with the remainder, if any, to be deposited into the General Fund.
(2) If the action is brought by a county counsel, the penalty shall first be used to reimburse the county counsel for the costs of bringing the action for civil penalties, with the remainder, if any, to be deposited into the General Fund.
(3) If the action is brought by a city attorney or city prosecutor, the penalty collected shall first be used to reimburse the city attorney or city prosecutor for the costs of bringing the action for civil penalties, with the remainder, if any, to be deposited into the General Fund.
(4) Actions for civil penalties pursuant to paragraph (2) of subdivision (a) shall be brought exclusively by the Attorney General on behalf of the people, on behalf of the department, or on behalf of the participating agency, or by a city or county counsel or city prosecutor in a city or county having a population in excess of 750,000.
(f) Notwithstanding subdivision (a), criminal penalties shall continue to apply to an unlicensed person engaging in commercial cannabis activity in violation of this division.
(g) This section does not limit, preempt, or otherwise affect any other state or local law, rule, regulation, or ordinance applicable to the conduct described in subdivision (a), or otherwise relating to commercial cannabis activities.
SEC. 2.
The Legislature finds and declares that this act furthers the purposes and intent of the Control, Regulate and Tax Adult Use of Marijuana Act.
Will Increased Civil Penalties Proposed by AB 2728 Solve the Problem of Unlawful Commercial Cannabis Activity?
Although the need for a crackdown on unlicensed cannabis activity is at an all-time high, it is unclear whether increasing the civil penalties associated with breaking the law will actually cut down on such activity. The reason why this is unclear is because, historically, a lack of enforcement against unlicensed operators has been the issue – not low penalties. If AB 2728 is passed and signed into law, it will likely be some time before the industry determines if the increased penalties actually act as a deterrent to illegal operators. However, unless State and local officials set aside resources, personnel, etc. to enforce the regulations regarding unlicensed operations, no deterrent effect is anticipated.
AB 2728 was originally introduced in the State Assembly on February 18, 2022. On May 5, 2022, Assembly Bill 2728 was read for a second time and ordered to a third reading.
Rogoway Law Group continues to monitor new and pending cannabis legislation in the State of California and will post similar snapshots about other proposed legislation in the weeks to come. Click here to learn about another piece of proposed legislation, Assembly Bill 1646, and make sure to sign up for Rogoway Law Group’s newsletter so that you don’t miss out on important information about the California cannabis industry.
