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The People Ex Rel. City of Dana Point v. Holistic Health et al

February 13, 2013

THE PEOPLE EX REL. CITY OF DANA POINT, PLAINTIFF AND RESPONDENT,
v.
HOLISTIC HEALTH ET AL., DEFENDANTS AND APPELLANTS.



(Super. Ct. No. 30-2010-00352106) Appeal from a judgment of the Superior Court of Orange County, David R. Chaffee, Judge.

The opinion of the court was delivered by: Aronson, J.

CERTIFIED FOR PUBLICATION

OPINION

Reversed.

A medical marijuana collective, Holistic Health, and its president, Garrison Williams, (collectively, Holistic Health) appeal from the trial court's entry of judgment in favor of the City of Dana Point (the City) following the City's summary judgment motion on nuisance abatement and illegal business practices causes of action. Holistic Health contends summary judgment was improper because triable issues of fact existed on a critical disputed issue: whether Holistic Health, incorporated as a nonprofit, actually operated in that manner in compliance with state medical marijuana law embodied in the Compassionate Use Act of 1996 (the CUA) (Health & Saf. Code, § 11362.5; all further statutory references are to this code unless noted), the Medical Marijuana Program Act (the MMPA) (§ 11362.7 et seq.) and Attorney General guidelines (the A.G. Guidelines) concerning medical marijuana dispensaries. Holistic Health also challenges as excessive the trial court's imposition of multimillion-dollar civil penalties, and argues the court failed to consider relevant evidence, improperly imposed the fines on Williams personally, and committed other legal errors.

As we explain, the record shows it remained a disputed issue of triable fact whether Holistic Health made a profit from distributing medical marijuana or instead was organized and operated as a nonprofit mutual benefit corporation. Accordingly, we need not reach Holistic Health's second contention concerning civil penalties because we conclude disputed issues of material fact prevented the trial court from properly granting summary judgment.

I

FACTUAL AND PROCEDURAL BACKGROUND

The City based its complaint on the "general proposition [that] the possession, sale, cultivation, or transportation of marijuana is a crime" (original boldface and italics) and that the absence of any tenable defense rendered Holistic Health's marijuana activities unlawful. As the litigation proceeded, the City focused its discovery efforts on establishing whether the collective violated state law by selling marijuana for profit. (§ 11362.765, subd. (a) ["nothing in this section shall authorize . . . any individual or group to cultivate or distribute marijuana for profit"]; see A.G. Guidelines at pp. 8-9 [recognizing "Non-Profit" cooperatives and collectives as lawful mutual benefit member associations for group cultivation and distribution of marijuana] (as of Feb. 7, 2013), original boldface.)

In particular, California law requires that all agricultural or consumer cooperative corporations must organize (Food & Agr. Code, § 54036; Corp. Code, § 12311, subd. (b)) and operate as nonprofit entities (Food & Agr. Code, § 54033; Corp. Code, § 12201). Nevertheless, they may make "patronage distributions" in amounts corresponding to each member's "patronage of the corporation" through the purchase of its good or services (Corp. Code, §§ 12243-12244), repay or refund member contributions (Corp. Code, § 12445), and even pay "dividends" thereon, as a form of interest on capital, without jeopardizing their nonprofit status. (Food & Agr. Code, § 54120 [eight percent "dividend[]" permissible on "excess of association income over association expenses"]; see generally A. James Roberts III, Understanding Agricultural Cooperatives (1984) 4 Cal. Lawyer, Vol. 4, No. 2, p. 13 ["These dividends are deemed to be in the nature of interest, and therefore do not adversely affect the non-profit character of cooperatives organized under the code"]; see also Corp. Code, §§ 12235, 12451 [annual distributions on contributed capital limited to 15 percent]; David C. Gurnick, Consumer Cooperatives: What They Are and How They Work (Aug. 1985) 8 L.A. Lawyer, Vol. 8, No. 5, p. 34 (Gurnick).) Valid nonprofit expenditures expressly include executive compensation: "An association may provide a fair remuneration" for "time . . . actually spent . . . in its service . . . ." (Food & Agr. Code, § 54147.)

The City explained in its summary judgment motion that "[t]he point of . . . discovery was to seek evidence as to whether Defendants were operating within the parameters of the CUA, the MMPA, and the A.G. Guidelines (as asserted in their oft repeated 'mantra'), or if instead they are nothing more than an illegal, for profit business enterprise engaged in illegally 'selling' marijuana for profit." The City's discovery efforts did not go smoothly; Holistic Health apparently sought a discovery stay and the City may have obtained an order to compel Williams to appear at his deposition, but these matters are not in the record.

When Williams appeared for his deposition, his counsel and the City's attorney discussed Williams's intention to invoke the Fifth Amendment and trade secret and medical privacy privileges on all questions pertaining to medical marijuana. The City broached the idea of an agreement between the parties that any information Williams or Holistic Health provided "will not be shared outside our office except for with respect to our expert witnesses in this case. It will be used [only] as part of this case. Any information that you designate is privileged we will treat as privileged, [and] make all efforts to keep confidential."

The City's attorney added, however: "I can tell you, just so you know, that one of my expert witnesses in this case will be Adam Powell of the Orange County Sheriff's Department who is in charge of the task force that's dealing with the illegal medical marijuana operations in Orange County. He will see this. I can tell you that Jeff Shunk of the Orange County District Attorney's Office is aware of this deposition and is likely to ask the court through a subpoena or a search warrant, or whatever else the D.A. uses . . . , for a copy of it. I don't want to kid you and make you think that this won't end up in the hands of federal authorities because it likely will[,] as well as [s]tate authorities." Williams and Holistic Health declined the City's confidentiality agreement on these terms, and Williams asserted the Fifth Amendment at his deposition on all questions about marijuana.

For example, as the City recounted in its eventual summary judgment motion, Williams asserted his right against self-incrimination to all of the following questions: whether Holistic Health sells marijuana products, the types or strains of marijuana products sold, whether Holistic Health receives monetary compensation in exchange for marijuana, whether Holistic Health acquires all of its marijuana from its members, the cash value of the marijuana sold by Holistic Health, the price it pays for marijuana, the cost to grow the marijuana it sells, how the price is determined for marijuana that it sells, and "the efforts (if any) made to determine that members and suppliers are not profiting when they provide marijuana to Holistic Health . . . ."

When Williams invoked the Fifth Amendment to these and similar questions at his deposition, the attorney for the City responded that he intended "to bring a motion to compel and I am going to seek not only monetary sanctions, but I'm going to seek issue sanctions in this case. It is my intention to seek a motion for summary judgment and permanent injunction to prevent Holistic Health from operating on the basis that it has failed to provide any evidence that its sales of marijuana are currently in a manner that complies with the Compassionate Use Act, the Medical Marijuana Program Act, and the Attorney General Guidelines."

The City also noticed the deposition of Holistic Health's custodian of records, but the parties stipulated the custodian would invoke the Fifth Amendment just as Williams had. The City did not bring a motion to compel discovery or to impose monetary or issue sanctions based on the privileges Williams and the custodian of records asserted. Instead, the City sought summary judgment, or in the alternative, summary adjudication.

The City asserted in its motion it was entitled to judgment as a matter of law because there was no dispute Holistic Health distributed marijuana and Holistic Health "fail[ed] to produce any evidence . . . in support of the[] only possible affirmative defense," i.e., compliance with governing medical marijuana law. Specifically, the City staked its claim for summary judgment on its assertion Holistic Health was "nothing more than an illegal, for profit business enterprise engaged in illegally 'selling' marijuana for profit." The City alleged Holistic Health failed to meet its affirmative burden "of demonstrating compliance with the CUA, MMPA and A.G. Guidelines (and refus[ed] to allow the City to conduct discovery into this issue) . . . ." And the City asserted Williams testified at his deposition that "Holistic Health operates as a 'business' and that its vendors are making a 'profit' by selling Holistic Health the marijuana products it purchases from them, . . . an unequivocal admission that [Holistic Health is] operating in violation of the express provisions of the CUA, MMPA, and the A.G. Guidelines." (Original italics and boldface.)

The City asserted in a footnote in its summary judgment motion that it was entitled to civil penalties on its fourth cause of action for illegal business practices, citing Business and Professions Code section 17206. The City expressly limited its claim to a maximum of $750,000 in civil penalties, calculated on a $2,500 per-day penalty assessment for 300 days. The City asserted Holistic Health operated ...


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