Virginia Law § 4.1-611. Seed-to-sale tracking system.
To ensure that no retail marijuana or retail marijuana products grown or processed by a marijuana establishment are sold or otherwise transferred except as authorized by law, the Board shall develop and maintain a seed-to-sale tracking system that tracks retail marijuana from either the seed or immature plant stage until the retail marijuana or retail marijuana product is sold to a customer at a retail marijuana store.
Quick Background
Seed to sale or track and trace systems became an official part of all state cannabis markets as a result of the 2013 U.S. Department of Justice Cole Memorandum (Cole Memo). The memo essentially informed the states that the federal government would intervene if the “states failed to prevent criminal involvement in the market, sales to youths, and illegal diversion to other states.” Since then the most dominant player in the seed to sale tracking space has been Metrc followed by BioTrack and Leaf Data Systems. These data systems are integrated between a state’s cannabis regulating agency and each operator in an all-in-one system that tracks every stage of the cannabis supply chain. While operators historically have been free to choose their platforms, they must also rely on the state tracking system. Operators must provide the state with relevant tracking data to stay compliant.
Current Issues
Track and trace regulations are complicated and some interested market participants in other legalized states have found themselves holding off due to the costs of compliance. Some of the issues relate to logistics delays in plant and product Radio-frequency identification tag (RFID) deliveries, which have nearly shut down some cannabis companies. RFID tags are used to identify and link the cannabis to the tracking system and the delays left many cannabis businesses scrambling and spending “thousands of dollars in extra time and money to remain in compliance with state regulations.” Other issues relating to sustainability have been discussed elsewhere for the one time use plastic tags.
In addition to the logistics delays for RFID’s, the tracking systems themselves are vulnerable “to malfunction, user error, malware, data breaches, and criminal exploitation.” The burden of data privacy and security is only going to be more important in the future for cannabis businesses and the lack of competition in the state contracting processes for track and trace systems is something emerging markets will want to contend with early on. As the cannabis industry continues to develop, I do expect increased competition for state contracts, but as of right now competition does not appear to be the priority. It is important that states foster a competitive process when considering mandating particular systems to use. More competition in the track and trace space will lead to better design and user experience, and most importantly less financial loss as a result of single points of failure.
Track and Trace Related Lawsuits
Buyer beware when it comes to state contracts for track and trace systems. The Medical Marijuana Authority and the Oklahoma Department of Health have recently learned that companies will not simply chill out as systemic problems slow down operations. In a class action lawsuit approximately 10,000 licensed cannabis businesses across the state of Oklahoma are arguing that the implementation of Metrc would create a monopoly by forcing cannabis businesses to buy tags for nearly every product that goes out, “there’s only one place the tags can come from though and that’s through Metrc, which allows them to control the pricing and availability.” The current litigation has placed a hold on the states implementation of Metrc, which will again have impacts of businesses as the process works its way through the courts. However, what is clear is that 10,000 licensed cannabis companies in Oklahoma did not feel listened to during the contracting process and this is something that Virginia can learn from.
It’s worth also mentioning that Oklahoma is not the first state to face pushback on Metrc. In Missouri, an appeals court recently upheld a decision that “found the state was correct in its position that Metrc was prohibited from charging marijuana companies extra for its tags.” Metrc inadvertently omitted the RFID tag costs in the Missouri contract. It was then unable to convince the state to amend the agreement and litigation ensued.
The Need For Track and Trace
Establishing a legitimate cannabis industry means transitioning from a black market to a legal one. Each state has an interest in creating a safe market for consumers that allows the legal cannabis businesses to prosper while at the same time decreasing the market share of those operating without license. Data tracking is essential to this process and track and trace systems are only going to be more important as new legal states come online. Companies like Metrc play a valuable part in the entire cannabis ecosystem. They serve as a conduit allowing operators and regulators to talk to each other through shared data. For any regulated business, compliance is a cornerstone. A good data tracking system at the state level is one that reduces burdens for users instead of increasing them. The system needs to make sense to the end users; the cannabis businesses who operate on real margins.
Recommendations for Virginia: Competition Equates to Accountability
Virginia must learn from our predecessor cannabis states where track and trace systems have faced scrutiny, litigation, and overall headaches. Implement a clear, transparent and fair contracting process that allows for competition and reduces the risk of single source failure. Having real options for track and trace systems should be the norm. There are multiple options to file taxes such as “TurboTax, Tax Slayer, H&R Block, etc.,” and for good reason. Competition promotes accountability by forcing companies to find the problems and fix them. Less competition necessarily equates to less accountability. Virginia must obligate its track and trace vendor(s) contractually to prevent systemic slow downs and outages. Those issues have tremendous impacts on cannabis businesses. Those system administrators must be responsive to the needs of the industry as it relates to systemic problems. The Cannabis Control Authority owes it to licensees to get this contract right. All eyes will be on Virginia when it unveils its track and trace vendor. Stay tuned to learn what additional requirements cannabis businesses may face.
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