The Michigan Cannabis Regulatory Agency hopes a new state-run marijuana testing lab can build trust in an industry in turmoil and ultimately root out potential corruption.
The Legislature is expected to approve the state budget in the coming weeks, which includes a $4.4 million earmark for the CRA to establish, build and staff its own reference testing lab. The state believes the new lab will boost regulators’ ability to stymie illicit product entering the legal market, audit private sector labs and optimize standard testing methodologies.
“The challenges facing the testing industry have been widely reported,” CRA Executive Director Brian Hanna told Crain’s. “There is no unbiased lab in existence in Michigan currently, so our goal is to be able to provide those services that will ultimately make the industry safer and save them money.”
Under state rules, marijuana growers are required to test 0.5% of a harvested batch of marijuana at an independent lab before it can be sold for consumer use. Batch sizes max out at 50 pounds under the regulations. In March alone, labs tested nearly 103,600 pounds of marijuana flower and shake with a consumer sales value of $11.3 million, based on CRA data.
But not all batches of marijuana sold in the legal market are being tested. Hanna was hired in September last year to step up enforcement as the legal industry bemoaned about oversupply due to illegal marijuana making it in the legal market. The cry out for enforcement occurred after adult-use prices plummeted to $80 per ounce of flower in January this year from more than $512.05 per ounce in January 2020, according to CRA data. Prices have since climbed to $86.87 per ounce last month, which Hanna credits to increased CRA enforcement.
The CRA investigations have revealed a troubling pattern of untested illicit product entering legal dispensaries. For example, the CRA suspended the medical and adult-use licenses of Lansing-based processor TAS Asset Holdings LLC for sourcing illicit market product, packaging it and selling to dispensaries. The investigation ended with 23 formal complaints against TAS, and hearings are scheduled to determine whether the company will permanently lose its licenses.
Currently, the CRA has to outsource marijuana testing during an investigation, a costly and lengthy process, said Hanna. An investigation costs between $2,700 and $27,000 and can take up to four months, he said.
“We appreciate the cooperation from the industry, but investigations cost them money,” Hanna said. “Proficiency testing at our lab, they will incur costs but the tests will be cheaper because we’re not interrupting a private lab.”
Backstopping private labs
The audit lab, in theory, will also help the CRA monitor the accuracy of private labs.
In 2021, the CRA alleged that tests on 64,000 pounds of marijuana product vetted by Bay City-based Viridis North — the state’s largest testing lab firm — contained “inaccurate and/or unreliable results” after spot checking the product at a different lab. The value of the recalled product at the time was roughly $229 million. A judge later ordered the CRA to release much of the product back into the market.
But the recall sent the industry into a brief spiral as more than 400 retailers across the state had the product in question on their shelves. Viridis alleged the recall covered upwards of 70% of marijuana product on store shelves for recreational use.
The company sued the CRA, and the two have been wrapped in litigation ever since. The CRA also accuses Viridis of inflating the THC content of products it was testing. High THC, the psychoactive ingredient in marijuana, is believed to be a driver in sales. Marijuana consumers see potency as the top indicator of quality and value, according to an article by MJBizDaily.
Viridis, which continues to defend itself in legal action against CRA officials, claims the state is harassing the firm and that its tests are accurate.
Benjamin Sobczak, partner at Detroit law firm Dickinson Wright and former chief legal officer for vertically-integrated marijuana company Pleasantrees, said the lack of standardization among testing methodologies is creating a headache for the industry and regulators.
“Right now, you’ve got private businesses and competitors who are used to checks and balances in this space,” Sobczak said. “It’s not about assigning a nefarious intent on these labs (who are producing different test results), but understanding that science is hard. It’s a brand new space, and with an absence of neutrality in this process there is always going to be an issue.”
That issue could be cleared up with the CRA implementing standard processes, Hanna said. The lab will work to create methodologies that can serve as a benchmark to clear up discrepancies between labs in the state and, hopefully, serve as a nationwide standard, Hanna said.
“We plan to assist in industry standardization and optimize testing methods, not just for us, but for CANNRA (Cannabis Regulators Association) and, potentially, the federal government as well,” Hanna said.
Regulators in Colorado and most recently California operate reference labs.
The reality is without a standard process, the entire industry is likely to end up in a consistent stream of lawsuits, Sobczak said.
In October last year, a class-action lawsuit was filed in California on behalf of customers against DreamFields, a multistate operator with locations in California, Arizona and Michigan, alleging the makers of Jeeter-branded products was inflating THC potency.
In the lawsuit, the defendants allege DreamFields was overstating THC content by more than 70%.
Sobczak said if the courts find that Viridis did, in fact, inflate THC content in its results, Michigan will see similar suits.
“If the outcome of the cases says Viridis’ processes are invalid all the stores that were selling these products where the higher THC content wasn’t truth, they will be sued,” Sobczak said. “The stores will be forced to pass that liability to the labs with the intent of finding out if they knew. There will be no trust in the system.”
Hanna said the new lab — which is budgeted for $2.8 million for the build-out and equipment with another $1.6 million to pay staffers — would inevitably eliminate the volatility in the market by restoring faith in the system.
“Using investigations to create that desired end state is what we need,” Hanna said. “Adding this capability will build trust.”