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Judge Calls Marijuana Warehouse a ‘Sham’

SAN FRANCISCO (CN) - A federal judge Monday snuffed out a pot club's lawsuit accusing the city of Oakland of forcing it out of business for refusing to participate in an "unlawful marijuana dispensary permit program."

Joe Hemp's First Hemp Bank and its founder David Clancy sued the city in November, claiming it is a "warehouse," not a "dispensary," so it falls outside the jurisdiction of local laws on marijuana sales.

The members-only cannabis club insists it qualifies for an exemption under the U.S. Controlled Substances Act, which allows warehousemen to avoid criminal penalties for possession of marijuana.

It says participating in the city's pot dispensary program would be an admission of guilt to selling marijuana, a violation of its Fifth Amendment right not to incriminate itself.

U.S. District Judge William Alsup didn't buy a word of it. He called the club's business structure a fa├žade intended to evade local and federal laws.

"Plaintiff's whole arrangement is a sham," Alsup wrote in a 9-page ruling. "Their customers are called 'members.' They go to the front desk and pay a 'service fee,' and get their regular dose of marijuana. The substance of this transaction is nothing more than a sale, which would place the plaintiffs' business squarely outside the protection of the warehouse exemption and plainly in violation of federal law."

Even if the business did qualify for an exemption under federal law, Alsup said, that would not prevent Oakland from defining the club as a dispensary and subjecting it to local regulations.

He rejected the argument that a local regulation requiring dispensaries to submit marijuana samples to independent laboratories for testing violates federal law by mandating an exchange of illegal substances.

The cannabis club cited a 2011 California Court of Appeals ruling, Pack v. Superior, which found a similar requirement for a permit scheme in Long Beach violated federal law.

Alsup cited Oakland attorney Jamilah Jefferson's comments in last week's hearing , that laboratory technicians can test samples on the premises of dispensaries without any exchanges or "distribution" taking place.

Alsup also dismissed arguments that the city's permitting program pre-empts federal law, finding "there is no federal right to serve as a warehouseman with which the permit scheme interferes."

As for the allegation that the city illegally seized the cannabis club's property without just compensation, Alsup found the club failed to exhaust remedies to seek compensation under state law.

He also rejected the club's claim that a warning letter from the U.S. Attorney's Office condemning Oakland's permitting of "industrial cannabis cultivation and manufacturing facilities" meant that applying for a permit constitutes an admission of violating federal law.

"Complying with the permit scheme is not an admission that the applicant is an industrial-scale manufacturer, for the permit scheme covers far more marijuana operations than industrial-scale manufacturers," Alsup wrote.

He dismissed without leave to amend, finding the plaintiffs could not state a "cognizable legal theory" for their claims and any amendment would be futile.

In November, Alsup denied the club's request for a restraining order against the city. The club has appealed that ruling to the Ninth Circuit.

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