Canada's Marijuana Gray Market Boom Isn't Going Anywhere

Don Briere was once convicted and sent to prison for running British Columbia's largest network of marijuana grow ops. So on Wednesday, when a Canadian judge ruled that the ban on growing medicinal marijuana at home was unconstitutional, Briere was elated.

"The personal production license people are all dancing in the street right now because they're able to produce quantities, and if they have leftovers they can sell to dispensaries," said the weed entrepreneur, who feeds his more than 20 dispensaries from these "leftovers."

Those small-scale producers, leftovers from a legal system that refuses to die, are effectively feeding a gray zone of medical marijuana dispensaries — that are, the government continually insists, illegal. Police have raided many of those dispensaries, a fact that hasn't changed since Trudeau's election.

Related: Canadians Can Grow Their Own Medical Marijuana, Court Says in Bombshell Ruling

In his ruling, Justice Michael Phelan called dispensaries "the heart of cannabis access," but even with hundreds tolerated in Toronto and British Columbia, they remain illegal and unregulated. And while that's good news for the dark-gray market, the court's finding that the Marijuana for Medical Purposes Regulations (MMPR), crafted by the previous government of Conservative Stephen Harper, was violating Canadians' constitutional rights has put businesses in Canada's government sanctioned-marijuana industry on edge. With no inkling of what regulations will look like, no timeline for when Prime Minister Justin Trudeau's government will legalize pot, and a pledge from the government to continue prosecuting pot dealers, Canada's legal and illegal marijuana peddlers are competing while stuck in purgatory.

And that purgatory may be fertile soil for the quasi-legal dispensaries.

While patients are allowed to buy their marijuana in the shops, owning and operating a dispensary is legally the same as trafficking marijuana.

Yet cities like Vancouver have tolerated the storefronts, leaving them to multiply rapidly. The most recent legal uncertainty is likely to accelerate that. The more dispensaries exist nation-wide, the more difficult they will be to shut down.

The MMPR regime was designed to end home growing and stamp out dispensaries, instead centralizing the cultivation of cannabis in the hands of a very small number of growers, dubbed Licensed Producers (LPs). When news of Phelan's ruling came down, the LPs' stocks dipped — erasing some of the gains they saw after Trudeau's electoral victory.

The value of those legal marijuana companies dropped five to 10 percent across the board, according market analysis. Canopy Growth Corp. — the parent company to Tweed, Canada's first and largest publicly traded pot producer — fell nearly 12 percent from a three-month high, following the ruling.

In a newsletter, Tweed insisted they were "optimistic" about the future.

"The federal court ruled yesterday that certain aspects of the MMPR regulations, the regulations that govern Tweed and all Licensed Producers, do not adequately give patients sufficient access to the medicine we produce," Tweed president Mark Zekulin wrote to clients Thursday. "Today I want to assure you that Tweed isn't going anywhere."

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Aaron Salz, who analyzes the marijuana business for Dundee Capital Markets, agrees, that despite uncertainty, Canada's licensed producers are still a good bet. In a report on the business impact of Wednesday's ruling, Salz likened growing your own marijuana to brewing your own beer: a hobby for some, but no competition for the likes of Heineken or Anheuser-Busch.

There are roughly 40,000 registered Canadian marijuana patients — with the right to grow their own stash, although not all do — but no reliable count of dispensaries.

Jenna Vallerian, a PhD candidate studying the marijuana industry at the University of Toronto, estimated there could be anywhere between 200 and 300 dispensaries, mostly in Vancouver, Victoria and Toronto. Vallerian agreed that licensed producers are in no danger, but also said that for patients, the dispensaries and growers — who long risked tangling with the law to supply medical marijuana — are an irreplaceable part of the system.

"I think what's going to happen is until we see some kind of legislative change, these dispensaries are going to continue to pop up and it's just going to keep growing," Vallerian said.

The court ruling gives the Liberal government six months to develop new legislation or appeal, before striking the MMPR from the law. On Wednesday, the Liberal's marijuana point man, former Toronto police commissioner Bill Blair, told an open Senate Liberal caucus that there is no set time frame for legalizing weed, and there will be no amnesty for those breaking the law.

Vallerian argued that a moratorium on prosecuting laws that the government intends to change would be a show of good faith from the Liberals. Tweed's president also urged action.

"The government does need to move quickly to set up a regime, because at some point it sort of gets entrenched and people get their education [about marijuana] from people without training," said Zekulin of the extant dispensary system.

Related: Canada's Largest Pharmacy Chain Is Quietly Thinking About Selling Medical Weed

Briere said all the pot his dispensaries sell is carefully examined and claimed the federal court ruling left licensed producers "twisting in the wind." He said he'd be happy to buy from companies like Tweed, if that's how regulation goes, but would rather see something akin to a system of regional microbreweries.Canopy Growth Corp. has a market capitalization of $291 million, but Zekulin bristled at the two-year-old company being compared to big beer brewers.

"I don't know that the dispensary is the craft brewer, I think the dispensary is the guy selling moonshine out of his trunk," he said.

Correction: This story previous misstated the name of Jenna Vallerian. 

Follow Jake Bleiberg on Twitter: @JZBleiberg