State regulators are a major step closer to ending their four-year long legal battle with cannabis testing lab Viridis Laboratories.
An administrative law judge overseeing a case brought by Viridis against the Michigan Cannabis Regulatory Agency ruled late last month that the state’s actions against Viridis, which included a massive product recall that nearly ground the state’s industry in 2021 to a halt, were legally justified.
The administrative law judge dismissed the case against the CRA with prejudice on Feb. 20, clearing the way for the case to enter state circuit court.
The cards are seemingly stacked against Viridis, as its lawsuits in the Michigan Court of Claims and in U.S. District Court have all previously been dismissed.
The circuit court is the last hurdle for the CRA. And experts say a ruling in its favor could unshackle the agency from the sidelines to enter a new phase of more aggressive enforcement against well-lawyered industry wrongdoers.
The CRA declined to comment as litigation is still active.
David Russell, partner at Foster Swift Collins & Smith and attorney for Viridis, confirmed to Crain’s the company would file exceptions to the administrative judge which could possibly cause them to review the case again.
The CRA targeted Viridis’ testing methods in 2021, arguing the Lansing-based lab was inflating the THC content results for customers and that it was hiding results that showed the presence of banned pesticides.
The recall of Viridis, which controlled nearly three-quarters of the marijuana testing market, removed an estimated $229 million worth of product from store shelves in November 2021. For context, the industry sold $120.8 million worth of adult-use marijuana that month, compared to $128.4 million worth the month prior, representing the first drop in sales for the industry. A judge eventually allowed for half of the recalled product to re-enter the consumer market a month later.
“Being the first and largest of its kind in Michigan, the recall served as an example of how quickly regulatory events can impact market considerations,” said Ben Sobczak, partner at Detroit law firm Dickinson Wright. “Some companies were materially injured from the product holds and recall. In addition, the recall made the entire market aware of the possibility that not everyone was playing by the same set of rules. ‘THC potency inflation’ was a subject of discussion amongst industry experts prior to the recall but afterwards, the general consumer took notice, and many shifted their purchasing habits as a result.”
Credit: Nic Antaya/Crain’s Detroit Business
Greg Michaud, CEO of Viridis Laboratories, at the company’s Bay City lab.
Unfounded conspiracy
The spat between the two organizations began early in the state’s legal adult-use market in 2020. Claire Patterson, the CRA’s chief science officer, shared concerns with Viridis over its testing procedures that were generating high THC content results, according to her testimony in the administrative hearings.
The state’s marijuana industry believed higher THC content for its products resulted in higher sales.
Patterson said Viridis was using a testing sample 80% smaller, 0.2 grams instead of 1 gram, than its CRA-approved standard operating procedures. Viridis was also, according to Patterson’s testimony, using an improper homogenization method.
Viridis pulverized marijuana samples down using a container with ceramic balls spun at certain RPMs. The CRA claims Viridis used more balls than approved and lowered the RPMs, all to create a higher potency percentage in testing.
Viridis later tried to get its new methods approved through the CRA but the agency refused to approve the methodology.
In a November 2023 meeting with Crain’s at its Bay City lab, Viridis CEO Greg Michaud said their new method was, in fact, the correct method. Michaud claimed Viridis’ competitors were simply using methods that produced incorrect, and lower, THC results.
Without expressing as much, the state was effectively accusing Viridis of cooking its test results to produce higher THC percentages at its clients’ requests.
By fall 2021, the rift widened when the CRA noticed discrepancies in Viridis’ microbial testing results when two samples that previously failed for the presence of aspergillus, a mold that can cause infections, suddenly passed testing by Viridis even though the product hadn’t been remediated. Marijuana that tests positive for molds can be remediated with irradiation to kill the pathogens and then be sold to the customer.
A CRA investigation found that Viridis’ Lansing location reported sample failures for the presence aspergillus 89% less than its competitors.
This led the CRA to initiate the massive November 2021 recall against Viridis and triggered the ensuing legal battle.
Michaud — who spent 26 years at the Michigan State Police, retiring as the captain of its forensic science division in 2016 — told Crain’s the targeting from the CRA was a conspiracy to destroy the then-dominant testing company in the state; though he did not provide evidence to back up his claim.
When asked why Viridis didn’t acquiesce to the CRA and return its testing methods to the former standard operating procedures, Michaud said the company’s investors demanded the best company they could operate and that the CRA was wrong in its accusations.
Credit: Nic Antaya/Crain’s Detroit Business
Cannabis testing at Viridis Laboratories.
A new level of enforcement
Instead, Viridis is continuing to risk it all.
The CRA has proposed a new rule set that seeks to change its enforcement capabilities, including adding the ability to suspend licenses as the administrative law judge process plays out. Had those been in place, the state would have shuttered Viridis’ operations years ago.
“… Cases like this case and a number of other high-profile cases that have demonstrated to CRA where they have shortcomings in their enforcement mechanisms in their existing administrative rules — and what changes they need in their administrative rules,” said John Fraser, partner and head of the cannabis practice for Detroit law firm Dykema Gossett. “You can see this most evidently in the changes that CRA has proposed … Certainly, the Viridis case sends a message, but I think it’s the changes that will come in the new rules that will have the bigger practical impact on CRA’s enforcement efforts.”
Eliminating wrongdoing in the industry has become even more critical for the CRA as the industry struggles under oversupply and record low prices.
Prices have fallen more than 28.6% since January 2024 to an average cost of $66.50 for an ounce of marijuana in the adult-use market last month. Those are the lowest prices in the country. In Oregon, the average cost of a gram of marijuana flower in January was $3.50, or about $99.22 per ounce.
Growers are starting to fold: earlier this month, Bay County marijuana operator Pincanna temporarily shuttered 31,500-square-feet of its grow facility and laid off employees to mitigate losses. Chicago-based PharmaCann shuttered its 207,000-square-foot LivWell Michigan cultivation site in Warren, laying off 222, in January. And in November, Fluresh shuttered its $46 million, 105,000-square-foot grow facility in Adrian.
“Certainly, a case of this magnitude has the attention of the industry and all stakeholders involved, so I do think the outcome of this case will send a message to the industry on the importance of having robust compliance measures in place,” Fraser said. “… and the consequences for failure to maintain robust compliance.”
In the meantime, the CRA has been allocated $5 million to open its own reference lab, a move to be able to cross-reference independent lab results and to build a stronger legal case to bring complaints. The lab is expected to begin operations later this year.
Dustin Walsh is a senior reporter for Crain’s Detroit Business, covering health care with a focus on industry change and operations, as well as the state’s emerging cannabis industry. He is also a regular columnist on all things health, labor, economics and more.
