On November 17, 2021, Michigan’s Marijuana Regulatory Agency announced what is likely the biggest recall of cannabis ever. The recall covered all products, except for certain concentrates, tested by two licensed laboratories over three months. It affected more than 65,000 pounds of flower with a wholesale value of more than $200 million.
The recall was based on concerns about microbial testing; MRA staff alleged that the two labs had given passing grades to products that contained aspergillus, a potentially harmful mold. The MRA ordered more than 400 retailers with affected product to cease sales until the product cleared further testing.
The MRA and cannabis businesses immediately encountered significant logistical problems, including inevitable testing backlogs. Licensees reported that Metrc — Michigan’s seed-to-sale tracking software — had no way for test results on “child” batches to trace back to other “child” packages from the same harvest batch. Some retailers had virtually no sellable flower, and some growers had virtually all of their product returned. As of January 3, 2022, much of the recalled product still had not been cleared.
Given the breadth and scope of the recall, it is unsurprising that the laboratories sued the MRA, and future litigation concerning financial losses of other licensees seems certain. The outcome will take months or even years to resolve. However, some preliminary observations and recommendations for the industry are already apparent.
1. Ensure that administrative rules provide explicit recall procedures: A principal reason for a regulated cannabis market is customer safety, necessarily imposing recalls or other remedial actions when standards aren’t met. Smooth implementation of a recall is critical for customers and industry stakeholders. While regulators need flexibility to address novel situations, benchmarks focused on public safety should guide regulators and the industry. Similar benchmarks can be found in other regulatory bodies, such as the Food and Drug Administration and the Consumer Products Safety Commission. Regulators should also ensure that administrative rules provide due process and opportunity for a quick regulatory hearing for a recall order to be modified, vacated or amended.
2. Table-top recall scenarios: State emergency management authorities, first responders, school teachers and students all drill for emergencies. Doing so not only leads to preparedness, but also allows participants to see what would otherwise be blind spots. State regulatory agencies and supporting software vendors, like Metrc, should not be working through complicated issues and changing procedures and operability on the fly.
Protocols in the event of a widespread testing failure should be implemented well before a recall is mandated. At the same time, cannabis producers and retailers should not be developing new procedures, but should already know what business units must respond and how.
3. Have a detailed product recall plan in place: A recall can be the most significant reputational event a company faces, and different members of management may have widely divergent views on how to address potentially unsafe product. During a crisis, a company will not have time to carefully consider and craft a recall plan. Accordingly, businesses should create a detailed plan and standard operating procedures that, at a minimum, designate: a) how and when the company will decide to implement voluntary recalls; b) who is in charge of decisions and implementation, including members of a recall response team, composed of senior management, compliance, health and safety, public relations and legal; c) how the company will document its activities and ensure that all subject products are captured; d) a mechanism for customers or vendors to disclose issues about products to ensure complaints are properly documented and acted upon; e) a mechanism for measuring the effectiveness of the recall; and f) notification procedures to the regulator.
Ideally, cannabis businesses will also have identified outside legal counsel and public relations firms that have experience with recalls in other industries.
4. Have product recall insurance: The financial strain that a product recall has on a business may be extraordinary and unpredictable. For some Michigan licensees, the recall impacted the vast majority of their inventory, and some are now facing solvency issues. While the Michigan recall is unusual in scale, even a much smaller recall can be disastrous for a business.
The costs of a recall can include shipping costs, restocking costs, disposal costs and lost revenues. Product recall insurance is commonplace in many manufacturing industries. Cannabis businesses should confer with their insurer to understand their product recall coverage.
With recalls inevitable, competent planning before one occurs is critical to mitigate harms to consumers and businesses.