"What we need," said Norton Arbelaez, a thirtysomething attorney and businessman in a suit and tie, "is a vertically integrated, closed-loop regulatory framework." The bureaucrats, politicians, and entrepreneurs crowding the conference room took notes, watched his PowerPoint slides, and furrowed their brows. This was the fourth meeting of a working group set up by a task force appointed by the governor of Colorado, and if you happened to wander by you would think it sounded as dull as the average subcommittee session anywhere.
Until you discerned the subject of the meeting. "We will be, and are, the cannabis industry in Colorado," Arbelaez proclaimed. "It is our necks that are on the line."
Last November, 75 years after Congress enacted national marijuana prohibition, voters in Colorado and Washington decided to opt out. After Coloradans approved Amendment 64, which legalized the production, possession, and distribution of marijuana for recreational use, Gov. John Hickenlooper appointed the Amendment 64 Implementation Task Force to advise state legislators on how to regulate the nascent cannabis industry, which for years had served patients under Colorado's medical marijuana law but now was authorized to supply any adult 21 or older. And as in all sorts of industries, the incumbents were trying to write the rules in their favor.
"We need to maintain the edifice of what continues to work in Colorado," said Arbelaez, who co-owns two medical marijuana dispensaries in Denver and serves on the board of the Medical Marijuana Industry Group. Among other things, he said, that means retaining a rule that requires pot retailers to grow at least 70 percent of what they sell while selling no more than 30 percent of what they grow to other outlets. Arbelaez argued that the 70/30 rule, designed to prevent recreational consumers from obtaining medical marijuana, would help stop diversion of recreational marijuana to minors or to other states and thereby discourage federal interference.
The other members of the working group seemed unpersuaded. Liquor stores do not make the distilled spirits they stock, and pharmacies do not produce the drugs they sell. Why should pot stores have to grow their own marijuana?
"I am still left scratching my head about vertical integration and why it's so important," said Denver City Councilman Chris Nevitt. "The 70 percent rule is endlessly complicated and confusing." Nevitt alluded to the financial interests at stake: When the rule took effect in 2011, more than a decade after Colorado voters approved the medical use of marijuana, dispensaries had to invest in growing space and equipment, and they were forced into sometimes awkward business partnerships with growers. "I totally understand the anxiety of an industry that has made all of these investments," Nevitt said. "But I am still scratching my head."
Jessica LeRoux, owner of Twirling Hippy Confections, a Denver business that supplies cannabis-infused chocolates and cheesecakes to medical marijuana centers (MMCs) across the state, concurred. "The 70/30 rule does not work," LeRoux stated flatly. "This is not vertical integration. This is vertical protectionism."
But most MMC owners in the room seemed to support the 70/30 rule. "The current medical marijuana system works for us," said Erica Freeman of Choice Organics in Fort Collins. "Changing the rules again will force new mergers," warned Tad Bowler of Rocky Road Remedies in Steamboat Springs. "The small centers won't be able to compete." Michael Elliott, executive director of the Medical Marijuana Industry Group, declared "we are united" in supporting the 70/30 rule.
A straw poll of the working group revealed that its members were overwhelmingly opposed to requiring vertical integration, instead favoring a more flexible approach that would allow retailers to grow whatever percentage of their inventory they wanted, including zero. But in the end, after several more weeks of meetings, the dispensaries represented by Elliott's group prevailed. In its March 13 report, the task force recommended that the 70/30 rule remain in effect for at least three years and that new entrants be excluded from the market for 12 months. Two months later, Gov. Hickenlooper signed a marijuana regulation bill that included watered-down versions of both ideas, extending 70/30 until October 2014 and giving MMCs a three-month head start in the licensing process.
"The industry did a really good job of building a coalition," explains University of Denver law professor Sam Kamin, a member of the task force. "They convinced law enforcement and public health that part of keeping the industry in check and part of keeping it diverse and keeping the feds at bay was the current model."
Rob Corry, a Denver attorney and longtime marijuana activist, is less polite, calling the 70/30 rule "completely unworkable and economically illiterate." But Corry sees a bright side to the dispute over vertical integration. "On the one hand," he says, "I'm disappointed at rent-seeking behavior and businesses that seek the heavy hand of government to prevent new competition. On the other hand, it means that our industry has grown up and is behaving like every other industry out there."
Conservatives for Cannabis
Normalizing a formerly criminal business is the avowed goal of Amendment 64, which declares that "marijuana should be regulated in a manner similar to alcohol." The initiative will succeed to the extent that it transforms a countercultural symbol into a capitalist commodity. Dutch officials like to say, regarding their policy of tolerating the retail sale of cannabis, that they made marijuana boring by making it legal. Something similar is happening in Colorado, where the head rush of passing Amendment 64 has given way to the headache of implementing it.
That process, which is supposed to culminate in state-licensed pot stores by next January, aims to address the concerns of marijuana's detractors as well as its fans. Among other things, that means trying to avoid a crackdown by the federal government, which cannot force Colorado to ban marijuana but can make trouble for businesses openly selling a product that remains illegal under the Controlled Substances Act. Wariness of the feds has shaped every aspect of the new legal regime, from the size of store signs to the size of marijuana brownies, from the amount of tax charged on a quarter-ounce of Hidden Valley Kush to the amount of THC allowed in a driver's bloodstream. These are the mundane details that will define Colorado's momentous experiment in pharmacological tolerance. Boring debates about vertical integration could signal the beginning of the end for the war on drugs.
Colorado and Washington are two of the 11 states that opted out of alcohol prohibition through ballot initiatives that voters approved in November 1932, more than a year before the 21st Amendment (which repealed alcohol prohibition nationally) was ratified. Eighty years later, Colorado and Washington used the same method to opt out of marijuana prohibition, by surprisingly strong margins of about 10 points in both states. The victory was especially striking in Colorado, which is more Republican than both Washington and California, where a marijuana legalization initiative lost by seven points just two years earlier. Four years before that, Colorado voters had resoundingly rejected Amendment 44, which would have merely made it legal to possess up to an ounce of marijuana. Amendment 64 accomplished that while also legalizing home cultivation and authorizing commercial production and distribution. Yet it was supported by 55 percent of voters, compared to the 41 percent who went for Amendment 44 in 2006.