HNHPC v. Dept. of Cannabis Control

Filed 8/2/23
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FOURTH APPELLATE DISTRICT
DIVISION THREE
HNHPC, INC.,
Plaintiff and Appellant, G061298
v. (Super. Ct. No. 30-2021-01221014)
DEPARTMENT OF CANNABIS OPINION
CONTROL et al.,
Defendants and Respondents.
Appeal from a judgment of the Superior Court of Orange County, Gregory
H. Lewis, Judge. Reversed.
Law Office of Jeff Augustini and Jeff Augustini for Plaintiff and Appellant.
Rob Bonta, Attorney General, Harinder K. Kapur, Assistant Attorney
General, Joshua B. Eisenberg and Ethan A. Turner, Deputy Attorneys General, for
Defendants and Respondents.
* * *
Plaintiff HNHPC, Inc., appeals from a judgment entered after the court
sustained, without leave to amend, the demurrer of defendants the Department of
Cannabis Control (the Department) and Nicole Elliott (collectively defendants) to the
first amended petition and complaint (FAP). The FAP alleged the Department failed to
perform its mandatory duties and/or failed to properly perform discretionary duties under
the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA).
1
(Bus. & Prof. Code, § 26000 et seq.) Among other things, section 26067 requires the
Department to “establish a track and trace program for reporting the movement of
cannabis and cannabis products throughout the distribution chain.” (§ 26067, subd. (a).)
To facilitate administration of the track and trace program, the statute also requires the
Department to create an electronic database. (Id., subd. (b)(1).) The statute states: “The
database shall be designed to flag irregularities for the department to investigate.”
(Id., subd. (b)(2), italics added.) While the FAP acknowledged the Department created a
track and trace system, it alleged the system does not flag irregularities as required by
section 26067. Plaintiff accordingly sought mandamus and injunctive relief compelling
defendants to comply with their duties and mandating they create and maintain a track
and trace system capable of identifying and flagging questionable information for further
investigation.
In sustaining defendants’ demurrer, the court took judicial notice of two
government contracts with a contractor to design the track and trace system and the
Department’s budget request for the 2021-2022 fiscal year. Relying on these documents,
the court found the Department had complied with its ministerial duties under section
26067.
1
All further statutory references are to the Business and Professions Code
unless otherwise stated.
2
On appeal, plaintiff contends the court erred by taking judicial notice of the
documents and by sustaining the demurrer. Assuming, without deciding, that the court
properly took judicial notice of the documents, the FAP still states a claim for a writ of
mandate and injunctive relief because the judicially noticed documents do not contradict
the FAP’s allegations. Because the FAP adequately pleaded facts to state a cause of
action for a writ of mandate and for injunctive relief, we reverse the judgment.
FACTS
The First Amended Petition and Complaint
In November 2021, plaintiff filed the FAP against defendants asserting
causes of action for: (1) a peremptory writ of mandate; and (2) injunctive relief. Plaintiff
alleged it is licensed by the State of California and City of Santa Ana to operate a
cannabis dispensary. With respect to the Department, plaintiff alleged it “is responsible
for, among other things, establishing, implementing, maintaining, and enforcing a ‘track
and trace program for reporting the movement of cannabis products throughout the
distribution chain,’ which was expressly mandated to include a ‘database’ that ‘shall be
designated to flag irregularities for the department to investigate.’” Elliot is alleged to be
the Director of the Department.
According to the FAP, the Department failed to perform its mandatory
duties and/or failed to properly perform discretionary duties under MAUCRSA.
(§ 26000 et seq.) Relying on section 26067, the FAP emphasized the Department was
required by the Legislature to create a track and trace system that “‘shall be designed to
flag irregularities for the department to investigate . . . .’”
Although the Department created and implemented a track and trace system
called Marijuana Enforcement Tracking Report and Compliance (METRC) the system
allegedly did not flag for irregularities. As a result, the FAP alleged there is an
“exponential rise of ‘burner distributors’ . . . that conceal and launder State-grown
3
cannabis for delivery to illegal dispensaries and other unregulated markets within the
State as well as for the illegal transport across state lines, all without paying significant
legally mandated taxes . . . that other law abiding cannabis licensees [such as plaintiff]
are required . . . to pay to the State.” The increased use of burner distributors (Burner
Distros) allegedly harmed the public and licensed cannabis operators because the Burner
Distros undercut legitimate distributors and dispensaries by selling cheaper, unregulated,
and untaxed cannabis products. In short, the FAP alleged the Department bolstered “the
illegal black market in California and . . . greatly encouraged the illegal export of
cannabis across state lines” “by refusing to perform its ministerial duty to flag
irregularities within the track and trace system.”
The FAP further alleged the current track and trace system could be
designed or modified “to flag . . . irregularities and to easily identify Burner Distros, but
it would require the State to amend its agreement with the developer of METRC to
authorize the work necessary to do so.” The Department allegedly refused to modify the
track and trace system to comply with the law and the Department’s mandatory duties.
To the extent defendants had discretion in the creation, implementation, or operation of
the track and trace system, including the elements to be flagged for investigation, the
FAP alleged defendants abused their discretion.
Based on the above allegations, plaintiff sought mandamus and injunctive
relief compelling defendants to comply with their duties and mandating they create and
maintain a track and trace system capable of identifying and flagging questionable
information for further investigation.
Defendants’ Demurrer
In December 2021, defendants filed a demurrer. They argued the FAP was
speculative and conclusory, plaintiff failed to allege the elements of traditional
mandamus relief, and injunctive relief was unwarranted. With respect to mandamus
4
relief, defendants argued they satisfied any mandatory duties under section 26067. They
noted there was a track and trace system in place, and the Department “contracted for the
design of an electronic database and specifically identified the need to flag irregularities.”
They further emphasized the relevant contract established a methodology for ongoing
cooperation between the Department and a third-party company to develop criteria for
flagging irregularities. Finally, defendants noted they allocated resources for strategic
enforcement efforts. Beyond these duties, defendants argued any remaining duties were
discretionary, including the creation of a track and trace system and the deadline to
complete the design of the required electronic database.
In support of their demurrer, defendants filed a request for judicial notice
and asked the court to take judicial notice of three documents pursuant to Evidence Code
section 452, subdivisions (c) and (h): (1) a 2017 contract between the California
2
Department of Food and Agriculture and Franwell, Inc.; (2) a 2021 contract between the
California Department of Food and Agriculture and METRC, Inc.; and (3) the
Department’s budget request for the 2021-2022 fiscal year.
The two contracts were agreements with a contractor to design the
California cannabis track and trace (CCTT) system. Among other things, the initial and
renewed contracts identified various business needs. In identifying one of those business
needs, the contracts stated: “The Licensing Authorities need to be aware of ‘irregular’
cannabis distribution chain activity (e.g. activity that falls outside expected values and
statistical norms). The Licensing Authorities will designate the criteria used to flag
irregular activity and will refine this criteria over time. Therefore, the [cannabis activity
2
Prior to the Department, the California Department of Food and Agriculture
was one of the agencies responsible for licensing and regulating commercial cannabis
activity in the state. (§ 26010.7, subd. (a) [“the Department . . . shall succeed to and be
vested with all the duties, powers, purposes, functions, responsibilities, and jurisdiction of
the Bureau of Cannabis Control, . . . the State Department of Public Health, and the
Department of Food and Agriculture”].)
5
tracking] solution must automatically flag irregularities based on identified criteria and
allow the Licensing Authorities to review the specific cannabis distribution chain activity
information that is flagged as irregular.”
The Department’s budget request for the 2021-2022 fiscal year included a
section on the Department’s “[i]mplementation [p]lan.” The plan included “continued
enhancements to licensing and track and trace systems.” It also appears the Department
sought funding for analysis of data aggregated through the CCTT platform, to “[c]onduct
more strategic and streamlined compliance and enforcement processes,” and to hire
information technology staff for the CCTT team.
The Court’s Order and Judgment
In January 2022, the court granted defendants’ request for judicial notice
and sustained the demurrer without leave to amend. With respect to the request for
judicial notice, the court found the documents were official acts and records of a state
agency and were not reasonably subject to dispute. (Evid. Code, § 452, subds. (c), (h).)
The court noted: “‘Where, as here, judicial notice is requested of a legally operative
document—like a contract—the court may take notice not only of the fact of the
document and its recording or publication, but also facts that clearly derive from its legal
effect . . . . Moreover, whether the fact derives from the legal effect of a document or
from a statement within the document, the fact may be judicially noticed where, as here,
the fact is not reasonably subject to dispute.’”
With respect to plaintiff’s petition for writ of mandate, the court concluded
the judicially noticed documents demonstrated the Department complied with its
ministerial duty. The court added that plaintiff did “not have standing to micro-manage
the [Department’s] compliance. The manner of compliance is left to [the Department’s]
discretion.” Because the Department complied with its mandatory duty under section
26067, the court found there could be no preliminary injunction.
6
Finally, the court denied leave to amend. The court noted plaintiff
requested leave to amend because most of the Department’s arguments were based on
uncertainty, ambiguity, or inconsistency. But the court emphasized it sustained the
demurrer “based on [the Department’s] compliance with the duty to implement a track
and trace electronic database.” The court accordingly held there was no way plaintiff
could cure this defect.
The court entered judgment in favor of defendants in March 2022, and
plaintiff filed a timely notice of appeal.
DISCUSSION
Plaintiff contends the court erred by taking judicial notice of the contracts
and the Department’s budget request and by sustaining the demurrer. Plaintiff
alternatively argues the court erred by denying leave to amend. Assuming, without
deciding, that the court properly took judicial notice of the documents, the FAP still states
a claim for a writ of mandate and injunctive relief because the documents do not
contradict the FAP’s allegations. Contrary to the court’s holding, the documents do not
conclusively show the Department created an electronic database that flags irregularities
for further investigation. We accordingly reverse the judgment.
3
Applicable Law
In 2015, the Legislature enacted the Medical Marijuana Regulation and
Safety Act, which among other things, created a licensing scheme for medical marijuana.
(Former § 19300 et seq.; Stats. 2015, ch. 689, § 4; Safe Life Caregivers v. City of Los
Angeles (2016) 243 Cal.App.4th 1029, 1045.) After passage of Proposition 64 (the
3
Defendants summarize various details about the laws that preceded
MAUCRSA. We briefly summarize those laws for background, but we do not include all
the details as they are not necessary to resolve the instant case.
7
Control, Regulate, and Tax Adult Use Marijuana Act) in 2016 (People v. Castro (2022)
86 Cal.App.5th 314, 320), section 26067 (added by Stats. 2017, ch. 27, § 58) became law.
In 2017, pursuant to a statewide voter initiative, California enacted
MAUCRSA, which included an amended version of section 26067. (§ 26000 et seq.).
The purpose of MAUCRSA is “to establish a comprehensive system to control and
regulate the cultivation, distribution, transport, storage, manufacturing, processing, and
sale of” medicinal and adult-use cannabis. (Id., subd. (b).) The statute also “sets forth
the power and duties of the state agencies responsible for controlling and regulating the
commercial medicinal and adult-use cannabis industry.” (Id., subd. (c).)
Section 26067, subdivision (a)(1)-(5) provides: “[T]he [D]epartment shall
establish a track and trace program for reporting the movement of cannabis and cannabis
products throughout the distribution chain that utilizes a unique identifier and is capable
of providing information that captures” various details. At a minimum, the captured
information includes the licensee from which the product originated, the licensee
receiving the product, the transaction date, the unique identifier for the cannabis or
cannabis product, the date of retail sale to a customer, whether the sale is on the retail
premises or by delivery, and information relating to cannabis and cannabis products
leaving the licensed premises in a delivery vehicle. (Ibid.)
Section 26067, subdivision (b)(1) provides: “The [D]epartment, in
consultation with the California Department of Tax and Fee Administration, shall create
an electronic database containing the electronic shipping manifests to facilitate the
administration of the track and trace program, which shall include, but not be limited to,
the following information: [¶] (A) The variety and quantity or weight of cannabis or
cannabis products shipped. [¶] (B) The estimated times of departure and arrival. [¶] (C)
The variety and quantity or weight of cannabis or cannabis products received. [¶] (D)
The actual time of departure and arrival. [¶] (E) A categorization and the unique
identifier of the cannabis or cannabis product. [¶] (F) The license number issued by the
8
department for all licensees involved in the shipping process, including, but not limited
to, cultivators, manufacturers, distributors, and retailers.” As relevant here, section
26067, subdivision (b)(2), which is central to this appeal, states: “The database shall be
designed to flag irregularities for the department to investigate.” (Italics added.)
Standard of Review
“On appeal from a judgment after an order sustaining a demurrer, we
review the order de novo, exercising our independent judgment on whether the complaint
states a cause of action as a matter of law. [Citation.] We give the complaint a
reasonable interpretation, reading it as a whole and viewing its parts in context.
[Citation.] We deem all properly pleaded material facts as true. [Citation.] We must
also accept as true those facts that may be implied or inferred from those expressly
alleged.” (McMahon v. Craig (2009) 176 Cal.App.4th 1502, 1508-1509.) “‘“We also
consider matters which may be judicially noticed.”’” (Zelig v. County of Los Angeles
(2002) 27 Cal.4th 1112, 1126.)
“While the decision to sustain . . . a demurrer is a legal ruling subject to de
novo review on appeal, the granting of leave to amend involves an exercise of the trial
court’s discretion.” (McMahon v. Craig, supra, 176 Cal.App.4th at p. 1509.)
Request for Judicial Notice
At the outset, the parties disagree as to whether the court properly took
judicial notice of the contracts for the design of the CCTT system and the Department’s
budget request for the 2021-2022 fiscal year. Plaintiff acknowledges judicial notice can
be taken of “[o]fficial acts of the legislative, executive, and judicial departments of . . .
any state of the United States.” (Evid. Code, § 452, subd. (c).) But plaintiff argues a
court cannot take judicial notice of a public agency’s contract with a private party.
Plaintiff also claims the court could not take judicial notice of facts asserted in the
9
contracts. The Department disagrees and contends, “Entering into contracts and
requesting funding from the legislature clearly fall within” the scope of Evidence Code
section 452, subdivision (c). The Department also argues the documents are judicially
noticeable under Evidence Code section 452, subdivision (h) because their
“authenticity . . . is not reasonably subject to dispute as they have been authenticated by
the applicable custodian of records or published online, and are thus subject to immediate
and accurate determination.” Assuming, without deciding, that the documents were
judicially noticeable, they do not contradict the allegations in the FAP. As discussed
infra, the documents do not show the Department complied with its statutory duties.
Sufficiency of the FAP
A. Writ of Mandate Cause of Action
Plaintiff’s first cause of action seeks a writ of mandate for alleged
violations of section 26067, which requires, inter alia, the Department “in consultation
with the California Department of Tax and Fee Administration” to establish “an
electronic database containing shipping manifests to facilitate the administration of the
track and trace program.” (Id., subd. (b)(1).) “The database shall be designed to flag
irregularities for the department to investigate.” (Id., subd. (b)(2), italics added.)
Plaintiff argues the FAP stated a viable claim for a writ of mandate and the court erred by
finding the Department had complied with its mandatory duties. We agree.
“A writ of mandate may be issued by any court to any inferior tribunal,
corporation, board, or person, to compel the performance of an act which the law
specially enjoins, as a duty resulting from an office, trust, or station . . . .” (Code Civ.
Proc., § 1085, subd. (a).) A writ of mandate “must be issued in all cases where there is
not a plain, speedy, and adequate remedy, in the ordinary course of law.” (Code Civ.
Proc., § 1086.) “‘Mandamus . . . is the traditional remedy for the failure of a public
official to perform a legal duty.’” (People for Ethical Operation of Prosecutors ETC. v.
10
Spitzer (2020) 53 Cal.App.5th 391, 407.) To adequately state a claim for the issuance of
a writ of mandate, a petitioner must allege: (1) “the public official or entity had a
ministerial duty to perform”; and (2) “the petitioner had a clear and beneficial right to
performance.” (Physicians Committee for Responsible Medicine v. Los Angeles Unified
School Dist. (2019) 43 Cal.App.5th 175, 184.) We address each element in turn below.
1. Ministerial Duty
“‘A ministerial act is an act that a public officer is required to perform in a
prescribed manner in obedience to the mandate of legal authority and without regard to
his [or her] own judgment or opinion concerning such act’s propriety or impropriety,
when a given state of facts exists. Discretion . . . is the power conferred on public
functionaries to act officially according to the dictates of their own judgment.’”
(AIDS Healthcare Foundation v. Los Angeles County Dept. of Public Health (2011) 197
Cal.App.4th 693, 700.) “Generally, mandamus may be used only to compel the
performance of a duty that is purely ministerial in character. [Citaiton.] The remedy may
not be invoked to control an exercise of discretion, i.e., to compel an official to exercise
discretion in a particular way.” (Ridgecrest Charter School v. Sierra Sands Unified
School Dist. (2005) 130 Cal.App.4th 986, 1002.) “While a party may not invoke
mandamus to force a public entity to exercise discretionary powers in any particular
manner, if the entity refuses to act, mandate is available to compel the exercise of those
discretionary powers in some way.” (Ellena v. Department of Ins. (2014) 230
Cal.App.4th 198, 205 (Ellena).) Whether a statute imposes a ministerial duty is a
question of statutory interpretation. (AIDS Healthcare Foundation, at p. 701.)
Defendants contend the Department’s duty under section 26067,
subdivision (b)(2) was discretionary rather than ministerial. They argue “creating an
electronic database that flags irregularities is an enterprise that requires creativity,
strategy, and many decisions made with overall policy goals and current industry trends
11
in mind. It does not involve carrying out a ministerial function or meeting a statutory
deadline.” We disagree with defendants’ characterization of the Department’s duty.
The statute expressly requires the Department to establish an electronic
database that “shall be designed to flag irregularities for the department to investigate.”
(§ 26067, subdivision (b)(2), italics added.) Section 19 of the same code states: “‘Shall’
is mandatory and ‘may’ is permissive.” (Ibid.) “We recognize that the use of the word
‘shall’ in a statute does not necessarily create a mandatory duty.” (Ellena, supra, 230
Cal.App.4th at p. 211.) But, in the instant case, the statute requires the Department to
design the electronic database to flag irregularities. (Wittenburg v. Beachwalk
Homeowners Assn. (2013) 217 Cal.App.4th 654, 667 [“‘Ordinarily, the word “may”
connotes a discretionary or permissive act; the word “shall” connotes a mandatory or
directory duty’”]; Walt Rankin & Associates, Inc. v. City of Murrieta (2000) 84
Cal.App.4th 605, 614 [same].) The Department did not have discretion to disregard the
express flagging mandate. The court accordingly did not err by finding the Department’s
duty under section 26067 was ministerial. The FAP likewise adequately alleged the
Department’s duty under section 26067 was ministerial.
Relying on the judicially noticed contracts, defendants next claim the
Department complied with its statutory duty so there is nothing to compel. The court
likewise found the judicially noticed documents demonstrated the Department complied
with its ministerial duty. Not true. The contracts and budget request do not end the
inquiry. The Department did not have a duty to enter into a contract but to establish an
electronic database that actually flags irregularities. (§ 26067, subd. (b)(2).) The fact
still remains the full performance and completion of the contract per its terms—i.e., that
the Department provided flagging criteria to the developer who in turn incorporated it
into the system—is openly in dispute.
12
The FAP likewise alleged the Department had to create and implement a
system that flagged irregularities, but the current CCTT system allegedly does not flag
irregularities as legally required. Indeed, the FAP alleged the Department “faile[ed] to
perform (or to properly perform as required) their legal duty to implement a system to
properly track and flag irregularities”; and plaintiff “seeks to compel [defendants] to
actually perform their mandatory and/or discretionary legal duties, including . . . the
creation and operation of a track and trace system that in fact is designed to track and
trace cannabis throughout the entire process, and to identify and flag irregularities and
questionable transactions for further [investigation]—something it does not do now.”
The FAP emphasizes “the track and trace system they designed and implemented cannot
and is not flagging irregularities and questionable information that would, inter alia,
reveal unlawful conduct . . . .” The judicially noticed documents do not contradict any of
these allegations as a matter of law. (Intengan v. BAC Home Loans Servicing LP (2013)
214 Cal.App.4th 1047, 1055 [complaint’s allegations may be disregarded if judicially
noticed facts contradict the allegations].)
In any event, the FAP also adequately alleges the Department abused its
discretion. Mandamus may be used to correct an abuse of discretion. (American Board
of Cosmetic Surgery v. Medical Board of California (2008) 162 Cal.App.4th 534, 547.)
When reviewing an exercise of discretion, “the judicial inquiry . . . addresses whether the
public entity’s action was arbitrary, capricious or entirely without evidentiary support,
and whether it failed to conform to procedures required by law.” (California Public
Records Research, Inc. v. County of Stanislaus (2016) 246 Cal.App.4th 1432, 1443.) The
FAP alleges the Department chose not to incorporate flagging capabilities into the CCTT
system as required by law and by failing to design the system to track basic irregularities.
The judicially noticed documents do not contradict any of these allegations or show the
Department actually exercised discretion with respect to the flagging capabilities.
13
2. Standing
Turning to the standing question, we conclude plaintiff adequately alleged
the existence of a clear, present, and beneficial right to the remedy it sought. (Ellena,
supra, 230 Cal.App.4th at p. 211.) Normally, a party must be “beneficially interested” to
have standing to seek a writ of mandate. (Code Civ. Proc., § 1086.) “‘The requirement
that a petitioner be “beneficially interested” has been generally interpreted to mean that
one may obtain the writ only if the person has some special interest to be served or some
particular right to be preserved or protected over and above the interest held in common
with the public at large.’” (Save the Plastic Bag Coalition v. City of Manhattan Beach
(2011) 52 Cal.4th 155, 165.)
Plaintiff’s interests here surely suffice. Plaintiff alleged it would directly
and substantially benefit from requiring the Department to comply with the laws intended
to protect it. As a state cannabis licensee who “‘play[s] by the rules,” plaintiff alleged it
was harmed by the Department’s refusal to implement a CCTT system that in fact flags
irregularities. The FAP explains defendants “have substantially undermined the
competitiveness and financial success of operators such as [plaintiff]” by allowing illegal
dispensaries and black market sellers to sell cannabis at significantly lower prices. Given
these allegations, plaintiff has adequately alleged standing to pursue a claim for a writ of
mandate. (Save the Plastic Bag Coalition v. City of Manhattan Beach, supra, 52 Cal.4th
155, 165 [“‘“One who is in fact adversely affected by governmental action should have
standing to challenge that action if it is judicially reviewable”’”].)
14
According to defendants, “the prediction that forcing the Department to
take some additional or different action would result in a reduction in criminal
competition to licensed operators is speculative . . . .” But this argument raises factual
questions that cannot be determined on demurrer. (Doheny Park Terrace Homeowners
Assn., Inc. v. Truck Ins. Exchange (2005) 132 Cal.App.4th 1076, 1098 [finding the
plaintiff “was only required to plead ultimate facts” and “[w]ether it [could] produce . . .
evidence that will in fact support all or any of those allegations . . . is another matter”].)
Because the FAP adequately alleged the requirement of beneficial interest,
we need not address the parties’ arguments as to whether plaintiff also has public interest
standing.
B. Claim for Injunctive Relief
In its second cause of action, plaintiff seeks an injunction compelling
defendants “to comply with their mandatory and/or discretionary legal duties vis-à-vis the
track and trace system and their enforcement obligations under State law, and mandating
that they create and maintain a track and trace system that is capable of identifying and
flagging . . . questionable transactions and information . . . .”
Defendants note injunctive relief is a remedy and not a cause of action.
This is true. (Shamsian v. Atlantic Richfield Co. (2003) 107 Cal.App.4th 967, 984.)
Plaintiff’s claim is really a request for an injunction and derives from the allegations of
the mandate claim. Because plaintiff has pled a viable claim for a writ of mandate,
injunctive relief also is available. (Korean American Legal Advocacy Foundation v. City
of Los Angeles (1994) 23 Cal.App.4th 376, 399 [“‘a cause of action must exist before
injunctive relief may be granted’”].)
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DISPOSITION
The judgment is reversed. Plaintiff shall recover costs incurred on appeal.
SANCHEZ, J.
WE CONCUR:
O’LEARY, P. J.
GOETHALS, J.
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