Alleged backdoor backpack hiding of illegal cannabis leads Minnesota agency to sue hemp retailer Zaza Lake Street

The state Office Cannabis Management has filed suit against a St. Paul and Minneapolis hemp retailer, asking a judge to permit it to destroy as much as $20,000 worth of cannabis products the state alleges are illegal.

The suit, filed this week in Hennepin County District Court, names Zaza Lake Street, LLC, as the defendant in the action that followed multiple inspections of the business’ store, the most recent coming in September. A separate action in Ramsey County is asking for similar permission for confiscated products from a St. Paul Store, OCM stated in the Hennepin suit.

“The OCM’s inspections not only confirmed that defendant was selling illegal cannabinoid products, but that defendant attempted to conceal its unlawful sales,” the Hennepin lawsuit states. “For example, during initial inspections by the OCM of a related cannabinoid retail business, one of the employees would stall the OCM’s inspector while another would remove the illegal products from the store in a backpack through the backdoor.”

The inspections and violations involve the alleged sale of not-yet-legal cannabis products, some of which will likely become legal once the state starts retail sales under the 2023 recreational cannabis law. While there are retailers who have registered with the state to sell hemp-derived edibles, there are not yet licensed retailers to sell high-potency cannabis from marijuana plants. 

After that earlier inspection, OCM would use two inspectors, stationing one at the back door to prevent anyone from leaving. Still, even after finding illegal products hidden in the store, an employee refused to allow inspectors to search a backpack held by the employee.

At the September inspection, “OCM inspectors were able to catch defendant in the act,” the suit states. Testing of the suspected illegal vapes and raw cannabis flower “revealed that some of the embargoed products … contained tetrahydrocannabinol (THC) levels up to seventy times higher than the legal limit. OCM inspectors also seized vapes that contained facially noncompliant THC levels.”

The OCM lawsuit that was left at the door of Zaza headquarters on W. Broadway in Minneapolis claims the stores are owned by Darren Dado, according to state corporation records. A MinnPost email to an address listed on Zaza’s Facebook page was not returned. A clerk who answered the phone at the Lake Street store told MinnPost he didn’t know Dado and didn’t know the owner of the store. A clerk at the Grand Avenue store took a message for Dado. 

In a statement issued Thursday by OCM, the agency said it has tried to work with retailers to first educate them about the law. But it stated it was prepared to take further action “in instances where operators continue to flout the law.

“OCM has taken escalating enforcement action, including product embargoes, voluntary destruction, and issuing civil fines,” the statement read. “In this case, despite repeated inspections, both routine and triggered by complaints, Zaza refused to comply with the law. The egregious nature of the violations required the office to escalate our enforcement action. OCM will continue its efforts to educate businesses, consumers and the public about the legal cannabis marketplace, and when necessary, take appropriate action to ensure a marketplace that operates with integrity and fidelity to the law.”

While Minnesota tribal reservation stores operate outside OCM regulation, non-tribal retailers will not appear until the spring, at the earliest. Until then sales of raw cannabis flower and other products with THC levels higher than 0.3% are illegal. In March, OCM began a crackdown on sales of flower sometimes labeled as THCA, which purported to be raw flower from hemp plants, not marijuana plants.

Lab testing arranged by MinnPost in March showed the potency of raw flower for sale in Minnesota at 1.1% Delta 9 THC, three times the limit under state law. The same sample showed that the bud had Total THC content of 29.99%. Total THC is a measure of all different types of THC in the flower and 29.99% is similar to the types of flower sold in legal recreational marijuana states. 

After informing retailers in March that the state would begin sanctioning illegal sales, and allowing an education period where no citations were issued, the OCM ratched up its enforcement over the summer and fall. Through September it had confiscated and destroyed $564,000 worth of illegal products.

Assistant State Attorney General Ryan Petty outlined the inspection sequence in the lawsuit:

• OCM was acting on complaints about illegal sales from members of the public, one of whom observed the sale of raw cannabis flower and, when confronted by that person, was told “We’re giving the people what they’re asking for.”
• An inspector who arrived at the St. Paul dispensary on Aug. 16 was first made to wait to enter the store while an employee went into an office before returning and buzzing the inspector in. It was then that the OCM inspector saw a female employee leave with a backpack by a back door after stating she was “going to make a phone call.”
• Two inspectors visited the store on Sept. 6 with one entering through the front door and the other waiting outside the backdoor. The inspector inside the store found a series of noncompliant vapes that had THC levels in excess of 0.3%. The inspector found a backpack in a filing cabinet with multiple flowers and prerolled joints. The inspector also found similar flower in a trash bag at the bottom of a cart filled with cleaning supplies. The OCM inspector took samples for testing and also embargoed the remaining products — an action that means they were left in the store but sealed in a way that would reveal if the seal was tampered with.
• Some of the flower came with certificates of analysis — the lab test results all products are required to include — that suggested they were legal, OCM testing showed the flower was illegal and had THC levels ranging from 16.7% to 20.7%.
• Inspectors returned the same day, again with one inspector guarding the back door. The showroom, office and basement were inspected. Inspectors found packaged flower in the file cabinet and found noncompliant vapes, jars with trace amounts of flower, as well as vapes containing synthetic cannabinoids not legal in Minnesota.
• Some of the flower did have certificates suggesting compliance that testing showed was inaccurate. For example, one tested flower contained 23.2% THV, or over seventy-five times the legal limit, despite having a certificate of analysis suggesting compliant levels of less than 0.3%.
• An employee carrying a backpack during the last inspection was asked to open it for inspection. The employee refused. “On information and belief, the employee was speaking to Darren Dado. The owner told the employee not to let (the inspector) inspect the backpack.” After being told that would constitute a refusal of inspection, the employee still declined to open the backpack.

The lawsuit is specific to getting court approval to destroy illegal products over the objection of the retailer. It also asks the court to order Zaza to reimburse the state for the costs of destroying the illegal products, as well as court costs, fees, storage and other expenses of the state.

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