NEWS: How did Dana Point pull off $7M in marijuana winnings?

Dana Point isn't the first city to get monetary penalties tacked onto lawsuits against medical-marijuana dispensaries. But its $7 million haul has sent sticker shock throughout the cannabis community.

"Our attorneys say this case is unprecedented. They call it mind-boggling," said Dale Gieringer, director of California NORML and co-author of Proposition 215, a 1996 initiative passed by California voters that allows patients with a doctor's recommendation to possess and cultivate marijuana.

In May, Dana Point wrapped up the last of three public-nuisance lawsuits against collectives in Orange County Superior Court. In those cases, three different judges ordered the dispensaries to pay the small coastal city about $7 million in total. See a chronology of the legal battles here.

How did Dana Point pull it off?

The answer is in the way the city cracked down on collectives. While other cities have focused on land-use and zoning rules, which can bring closures but not cash, Dana Point took the extra step to use the business and professions code. That includes an "unfair competition" law that calls for a $2,500 fine per transaction or per day of operation for "any unlawful, unfair or fraudulent act or practice." Dana Point also got $50,000 from each dispensary because of the health and safety code, which prohibits distribution and sale of a controlled substance.

"Dana Point just took a much more aggressive stance and a much more creative stance," said Damian Nassiri, an attorney representing Lake Forest Wellness Center and Collective, which is in a zoning battle with that city.

Fighting a marijuana dispensary based on zoning is easier than trying to prove it is operating illegally, but the latter may be a bigger deterrent since the penalties are higher and may represent the next wave of attack, medical-marijuana experts said.

There's been a lot of talk around the state about governments using the unfair-competition law to curb medical-marijuana dispensaries, said Joe D'Agostino, Orange County's senior assistant district attorney. He called such dispensaries a "cause of concern."

STARTING THE FIGHT

When Dana Point began dipping into the choppy waters of marijuana law, it asked five dispensaries to hand over their financial records to help determine whether they were operating legally.

In November 2009, Superior Court Judge Glenda Sanders said the dispensaries had to hand over the records. Two of them left town, agreeing not to come back. Others wanted to appeal the decision. Later, the city decided not to pursue the records and changed course, filing lawsuits in March 2010 against the three remaining dispensaries, Holistic Health, Beach Cities Collective and The Point Alternative Care, claiming they constituted a public nuisance and were violating the business and professions and health and safety codes.

Though state law allows nonprofit collectives to provide medical marijuana to clients with a doctor's permission, Dana Point argued the dispensaries were selling pot for profit, including for nonmedical reasons. Dispensaries have denied that.

Dana Point's approach was shaped partly by another Orange County case. The federal 4th District Court of Appeals sent a case challenging Anaheim's ban on marijuana dispensaries back to Orange County Superior Court after the lower court had dismissed the challenge in 2007 on the reasoning that federal marijuana law, which bans the sale, cultivation and possession of marijuana, trumps state law.

David Chaffee, the Superior Court judge who dismissed the case, is the same one who on May 31 awarded Dana Point $2.68 million from Holistic Health, which he called "an illegal drug sales and distribution enterprise" and ordered it to close. He has yet to rule again on the Anaheim case, which many say could set a precedent.

The cloudiness of the Anaheim case encouraged Dana Point to frame its case on whether the dispensaries were following marijuana laws rather than zoning rules. That would mean costly legwork. Dana Point has spent more than $400,000 on legal fees for its pot cases.

NOT THE ONLY ONE

Dana Point isn't the first city to use this tactic. Los Angeles has done so several times in Los Angeles County Superior Court. But L.A.'s winnings per case have been much less than Dana Point's.

In one case against Holistic Caregivers, L.A. got a $45,000 judgment, $5,000 of which came from unfair-competition violations. In another, against Organica Inc., it got about $240,000, $80,000 from unfair-competition violations.

In all three of Dana Point's cases, the bulk of the winnings came from unfair-competition violations.

The results differ because the cities used the code differently. Dana Point asked the court to enact fines for each day the collectives were in operation. L.A. asked for fines per transaction made.

"The challenge of course is collecting the judgments," said Asha Greenberg, Los Angeles assistant city attorney. "But absolutely, it's a complete deterrent. That's what you aim to do."

Government agencies also have begun placing other fines on dispensaries. In December, Orange County said it would fine violators of its ban on marijuana dispensaries and delivery services $1,000 per day.

ILLEGAL?

"It's illegal to sell marijuana," Greenberg said. "The law is written that either an individual can grow their own marijuana or people can get together to cultivate their marijuana. What we're seeing, though, is the Walmart or Costco model. That's not what the law envisioned."

When Dana Point tried to get dispensary founders to answer questions about their business practices, they invoked their Fifth Amendment rights against self-incrimination. But City Attorney Patrick Munoz said there were times when founders or their attorneys admitted to exchanging marijuana for money, using vendors that may have made profits or operating a retail store. Dispensary attorneys have said those statements were misconstrued and that their clients were operating within state law.

In all of Dana Point's lawsuits, the judges said it is the defendant's burden to show compliance with marijuana laws. But Holistic Health founder Garrison Williams said he couldn't show such evidence if it would violate clients' privacy rights. David Lambert, Beach Cities' founder, said he was willing to hand over records without patient information, but his offer was rejected.

WHAT'S NEXT

Nassiri, the attorney for Lake Forest Wellness Center and Collective, said that in most lawsuits involving cities and collectives, dispensaries have been losing in Superior Court and filing appeals. He said the California Supreme Court may eventually clarify the issue.

The state Legislature changed medical-marijuana laws recently to include a rule banning dispensaries from within 600 feet of a school. The regulation uses the terms "collectives" and "dispensaries," which haven't been used in other marijuana rules. That may play into future legal proceedings, said Alison Adams, Holistic Health's attorney.

Holistic Health and Beach Cities Collective are appealing Dana Point's lawsuit victories against them and have filed multimillion-dollar lawsuits claiming the city breached their rights to due process when it shut them down in January, citing building code violations. The dispensaries say the closures were done without inspections and thus were illegal. The city says some violations were outwardly visible and that inspections weren't necessary. A hearing on both cases is scheduled for Aug. 19 with Judge Sanders.

"We're going to be in court all summer," Lambert said.

Source: The Orange County Register