California-based Catalyst Cannabis last week filed a lawsuit against Glass House Brands Inc. alleging the company “has become one of the largest, if not the largest, black marketers of cannabis” in the state.
The lawsuit, claiming violations of the state’s Business & Professions Code, comes about a month after Catalyst CEO Elliot Lewis took to social media in front of a whiteboard and made similar claims about Glass House using “fourth-grade math” and its May 15 First Quarter 2023 Financial Results to allege that Glass House is “the biggest black marketeer … in the history of the United States.”
In the lawsuit, Catalyst says that prior to the May 15 report, Glass House had indicated that cannabis cultivation capacity in California had dropped 21%, flower prices fell over 20%, and there are 1,200 fewer active cultivation licenses; but meanwhile, the company’s report predicts a 62% increase in its own cannabis production from 2022 to 2023. In the May 15 report, Glass House also estimates its revenues would increase “upwards of $160 million.”
The lawsuit contends that Glass House “has specifically and intentionally structured its business operations to capitalize on the black market and to separate its legal operations from its illegal operations.”
“Separate and apart from its legal distribution channels [Glass House Brands] maintains a network of distributors specifically to handle the illicit black market sales of its cannabis,” the lawsuit contends, further claiming that by using Glass House’s own, publicly available information, it can be determined that in the fourth quarter of 2022 “upwards of 75%” of Glass House’s sales during the reporting period “were outside the legal market.”
Further, the lawsuit claims that Catalyst “has received information indicating that in many (if not most or all cases) [Glass House Brands] employees themselves seek out and make deals directly with black marketers, both in California and other states … and then use burner distros as ‘brokers’ or middle-men to transport the cannabis to illicit purchasers/users.”
The lawsuit describes “burner distros” as companies that are “generally licensed with the state but evade the payment of state taxation, as well as various safety and other regulations and controls, by selling to the black market.” The lawsuit does not name these companies.
“The dual channels approach permitted [Glass House] to substantially benefit from illegal sales while also ensuring prices in the legal market did not collapse entirely. … The dual channel structure it has employed is a huge ‘win-win’ for [Glass House Brands], but a huge loss for Catalyst and other legal operators who lose sales to illegal dispensaries and are required to actually pay the mandated taxes that are not paid in the black market transactions.” — Catalyst in the complaint
The lawsuit claims Glass House “engaged in illegal, fraudulent and unfair acts and business practices” calling for the activity to be “preliminarily and permanently enjoined.”
In an email to Ganjapreneur, Lewis said he had three objectives for filing the lawsuit: “overall state tax reform,” forcing Glass House “to stop flooding the black market with their product,” and to “keep diversity of product or craft farmers in the marketplace without giving what should be a clearly broken business model the ability to kill off small farmers…by using the black market as a piggy bank.”
“I think glasshouse is super unique case and I have wrestled with the filing of the litigation internally in my head quite a bit. And even today I continue to wrestle with it, and even more so, the ‘landing of the plane,’” Lewis wrote in the email. “Take off is much easier. Sometimes intention and outcome aren’t the same thing. We strive to play it day to day and try to make it so there is good outcome from all. If [Glass House] took reasonable measures to stop flooding the Black Market today, I would happily drop the lawsuit.”
Lewis added that he “had no intention” to get “involved in anybody’s personal business affairs” but that Glass House’s claims “seemed over the top and so hypocritical” and their actions “harmful to the industry as a whole.”
The lawsuit was filed in Los Angeles County Superior Court.
Glass House did not respond to requests for comment.
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