An Orange County Superior Court judge has ordered California’s Department of Cannabis Control to take steps to bring the state’s cannabis track-and-trace system into compliance with California law, concluding that the system does not currently flag irregular transactions for investigation.
The August 4, 2026, final judgment in HNHPC Inc. v. Department of Cannabis Control represents the latest development in nearly five years of litigation brought by HNHPC, the parent company of California cannabis retailer Catalyst. Jeff Augustini, the attorney who represented HNHPC, said the ruling confirms that the DCC has failed for more than eight years to fulfill its statutory duty to design and implement a compliant tracking system.
The decision follows an earlier ruling from California’s Fourth District Court of Appeal, which revived HNHPC’s case after a lower court had dismissed it. The appellate court held that the existence of contracts to develop a track-and-trace system did not establish that the DCC had actually fulfilled its legal obligation to create a database capable of flagging irregularities.
A system that collects data—but does not flag problems
California Business and Professions Code Section 26067 requires the DCC to establish a track-and-trace program covering the movement of cannabis and cannabis products through the licensed supply chain. The statute also requires the department’s electronic database to be designed to “flag irregularities” for investigation.
According to the judgment summary provided by Augustini, Judge Lee Gabriel found that the DCC’s current system—operated through the state’s California Cannabis Track-and-Trace program, commonly known as METRC—does not satisfy that requirement.
The court reportedly found that the system generates large volumes of reports and raw transaction data, but does not automatically identify potentially irregular activity using objective criteria. Instead, DCC analysts are manually reviewing the data without established definitions explaining what constitutes an irregular transaction.
All annual and provisional California cannabis licensees are required to use the state’s CCTT–METRC system to record inventory and product movement, regardless of whether a local jurisdiction uses another tracking platform.
Industry reaction
Hirsh Jain, a respected cannabis industry analyst, called the ruling “one of the most consequential cannabis regulatory decisions California has seen in years.” Jain said the judgment is significant not simply because Catalyst prevailed, but because it concludes that the DCC failed to implement the track-and-trace system California law requires.
He argued that the findings lend credibility to longstanding operator concerns that METRC imposes substantial compliance costs—including tagging, data entry, inventory reconciliation, employee training, audits and correction of reporting errors—without effectively identifying diversion or meaningfully disrupting the illicit market.
“If the system is not effectively identifying suspicious transactions or reducing diversion,” Jain said, “then it is imposing a significant compliance tax on the legal industry without delivering the public benefits that were used to justify those costs.”
Jain also said the implications could extend beyond California. Because METRC is used in numerous state cannabis markets, he expects policymakers elsewhere to question whether they are paying for systems that deliver the public benefits they promise. The decision could ultimately be cited in future litigation, legislative hearings and regulatory reform efforts in other METRC states.
The “burner distributor” problem
HNHPC’s lawsuit arose from allegations that certain intermediary distribution businesses—often described as “burner distributors”—were being used to move licensed cannabis into the illicit market. The company argued that inadequate monitoring allowed large volumes of product to be diverted and enabled the evasion of state taxes and cannabis regulations.
The appellate court’s 2023 decision did not determine whether those allegations were ultimately true. Instead, it held that HNHPC had adequately stated claims for a writ of mandate and injunctive relief, allowing the case to proceed. The court specifically rejected the idea that contracts and budget documents alone demonstrated the DCC’s compliance with its statutory obligations.
The final ruling now requires the DCC to take action.
Six months to establish objective criteria
Under the order described by Augustini, the DCC has six months to establish objective criteria defining an irregularity. Those criteria are intended to enable the state’s report-driven tracking system to detect and flag suspicious transactions without requiring analysts to search manually through unstructured data.
The order does not necessarily require California to replace METRC altogether. Rather, it appears to require the DCC to configure or supplement its existing system so that it performs the flagging function mandated by Section 26067.
METRC remains the state-required compliance platform, and licensees will continue to be responsible for entering inventory, shipment, transfer, and sales information into the system unless the DCC announces a change. The judgment is principally directed at the department’s oversight and enforcement architecture, not at eliminating operators’ existing reporting obligations.
Implementation and appeal could determine the impact
The outcome of the ruling will depend on how the DCC responds. The department could establish new criteria, modify its reporting processes, add automated detection tools or pursue appellate relief. In a LinkedIn post following the judgment, Augustini predicted that the DCC could appeal and resist meaningful implementation, potentially prolonging the dispute by another one to two years.
The DCC’s likely next steps will be closely watched by licensed operators competing with California’s illicit market. A state-commissioned study by ERA Economics for the Department of Cannabis Control found that unregulated channels supply about 2.4 million of the 3.8 million pounds consumed locally. The illicit cannabis market in California commands roughly 60% of total state consumption, meaning the legal market captures only about 40%.
A significant challenge to California’s regulatory model
The ruling is a significant judicial rebuke of California’s track-and-trace oversight, but it should not be overstated. The court did not necessarily find that every function of METRC is defective, nor did it hold that every transaction recorded in the system is unreliable.
Whether the ruling produces meaningful reform—or another prolonged legal and administrative fight—will become clearer over the next six months. For now, the decision gives California’s legal cannabis industry a formal judicial finding that collecting track-and-trace data is not enough.
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