Big Labor Looks at California’s Marijuana Market

When California voted 57% to 43% last November to legalize recreational marijuana—the eighth state to do so—it fertilized a national market whose value by some estimates could top $20 billion by 2020. The ballot initiative was backed by a phalanx of progressives—Napster founder Sean Parker provided the seed funding—and liberal interest groups such as the American Civil Liberties Union. But now as state lawmakers debate how to regulate the industry, one worry is that the Teamsters will hijack the process and corner the pot market.

California was the first state to legalize medical marijuana, in 1996. For two decades, local governments took the helm on regulation, which worked fine so long as most growers and dispensaries were mom-and-pop operations. But large businesses with sprawling operations necessitated a uniform statewide system. In 2015 the Legislature issued guidelines regulating the cultivation, manufacturing, delivery, testing, taxation and sale of pot for medicinal use.

The regulations, modeled on those enacted to control alcohol after Prohibition, established 17 different licenses. Manufacturers and cultivators can hold dispensary licenses, and dispensaries can be licensed to grow weed. But third-party distributors are required to negotiate the exchange between growers and retailers.

These middlemen are responsible for collecting taxes and transporting pot to laboratories for testing. They are forbidden from cultivating or selling cannabis. This framework of three tiers—cultivation, distribution and retail—is supposedly intended to ensure that every ounce of pot can be accounted for and that growers don’t illegally divert their product to the black market.

Law-enforcement officials are urging lawmakers to adopt the same model for recreational marijuana, since they believe a small number of wholesalers would be easier to audit than thousands of growers and retailers. They’re joined by the Teamsters, who hope to cash in on the pot market. “I’m not hiding our self-interest,” Teamsters lobbyist Barry Broad told Politico. “This is a growing industry and we’d like it to grow unionized.”

Yet progressives who championed the ballot initiative worry that mandating a three-tiered system would upend the free market and create the same kind of distortions that have beset the alcohol industry. Craft distillers and wineries have long complained that a few large alcohol distributors exercise oligopoly power. Spirits producers that refuse to pay distributors a sizable cut can get shut out of stores. Big businesses have an advantage because they can pay distributors more to negotiate primo shelf space. Retailers protest that their selection is limited because they cannot purchase directly from producers. As a result, consumers pay more and have fewer options.

The California Cannabis Industry Association—joined by business groups such as the California Retailers Association and the National Federation of Independent Business—is warning lawmakers that mandating third-party marijuana distribution would increase prices and introduce organized crime, a dig at the Teamsters’ history of racketeering.

Last month, cannabis groups sent a letter urging Gov. Jerry Brown to reject the idea: “We believe that allowing cultivators and manufacturers to hold distribution licenses is in the spirit of developing policies that will undo the illicit market rather than reinforce it, and provide opportunities for small producers to compete with larger players.”

For their part, the Teamsters argue that a three-tiered system is necessary to prevent vertical integration that could lead to higher prices. “It raises really significant antitrust issues that we don’t think are accounted for,” Mr. Broad, the union lobbyist, told the Sacramento Bee. “It’s quite conceivable that the entire market can be owned by someone who also controls distribution and access to the market.”

But vertical integration can produce efficiencies, and it’s doubtful that one large business could corner the market unless granted a monopoly by the government. The state doesn’t mandate a three-tiered system for fresh produce, but farmers and grocers go through wholesalers anyway because it’s economical. A tomato grower may not want to negotiate individually with hundreds of restaurants or store managers. Nonetheless, a farmer may want the ability to sell his produce directly to customers at a farmers market.

The bigger risk is that a few distributors could control access to the market, and that the Teamsters could disrupt the free flow of marijuana by going on strike. Yet Mr. Broad seems confident the legislature will see things his way. “To have local government, organized labor and law enforcement all together is a pretty potent alliance,” he told Politico. “What’s on the other side? A couple marijuana people with illusions of grandeur?”

Never underestimate the clout of labor unions in Sacramento. Still, the Teamsters may find themselves outgunned by pot businesses and investors that have billions at stake in ensuring the industry’s growth isn’t inhibited.

Ms. Finley is an editorial writer for the Journal.

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