SIOUX FALLS, S.D. (KELO) — A South Dakota medical marijuana company, 605 Cannabis (605), has filed suit against the South Dakota Department of Health (DOH), alleging overreach, improper issuance of violations and attempts to enforce un-promulgated rules, which have led to damages of over $1 million.
Forty-nine pages of court filings obtained by KELOLAND News spell out 605’s case, which dates back to a January 2023 inspection of their facility, which the company claims was carried out improperly, while the business was partially closed due to a blizzard.
From the complaint filed March, 23:
On January 19, 2023, the region where the 605 Facilities (manufacturing and cultivation) are located was covered in snow due to a blizzard and the 605 Facilities were consequently not fully operational, not open during its normal business hours, and key staff members were not present.Excerpt from complaint filed by 605 Cannabis
605 claims that despite their limited staff and closure, the DOH proceeded to inspect the facility in violation of a rule that requires inspections to occur during business hours.
The company alleges that during this inspection, samples of cannabis and products were taken. The DOH later issued a report alleging 19 violations. 605 claims that the report did not distinguish if the violations occurred within the company’s cultivation or manufacturing facilities.
On February 8, the DOH issued an emergency order, identifying nine serious violations from the inspection, and suspending 605’s manufacturing and cultivation licenses.
The nine violations listed by the DOH are as follows:
- (Finding 1) The failure to test cannabis intended for consumption prior to transfer for retail sale;
- (Finding 2) The addition of Delta-8 and terpenes to cannabis sold;
- (Finding 4) The failure to remediate a non-useable batch of cannabis, failure to follow operating procedures and failure to have functioning security cameras;
- (Finding 5) The addition of improper additives to cannabis;
- (Finding 7) The material noncompliance with inventory recordkeeping for transfer, testing and transaction records;
- (Finding 11) The failure to secure facility with permanently fixed security cameras;
- (Finding 12) The failure to provide computer access to cameras or to verify the recording ability of the camera system;
- (Finding 20) The failure to provide pesticide application certification for agent applying pesticides; and
- (Finding 21) The failure to provide food service establishment license for manufacturing edible cannabis.
In its complaint filed against the DOH, 605 offers refutations of, or explanations for, each of these violations. These are outlined below:
Finding 1 – The failure to test cannabis intended for consumption prior to transfer for retail sale.
605 claims it has provided proof of testing for all products alleged to have not been tested prior to transfer for retail sale.
Finding 2 – The addition of Delta-8 and terpenes to cannabis sold.
605 says that while the products do contain Delta-8 and terpenes, the Delta-8 was naturally occurring and was not added, and that proof of testing was provided for all terpenes, which were naturally botanically derived and FDA approved.
The company also maintains that state rules and statutes do not prohibit the presence of Delta-8 and terpenes in cannabis products.
“605 has requested the Department provide statutory or administrative authority for the prohibited use of Delta-8 and terpenes in medical cannabis, but has received no response,” reads the complaint.
Finding 4 – The failure to remediate a non-useable batch of cannabis, failure to follow operating procedures and failure to have functioning security cameras.
605 claims that due to limited staffing while the business was closed, the inspector had been misinformed about destruction of cannabis. The company says no cannabis was destroyed that would have required following operating procedures for remediation or destruction.
The company also says they had fully functional cameras at the time of the inspection, but that they did reconfigure the system afterward, of which they informed the DOH.
Finding 5 – The addition of improper additives to cannabis.
Also applying to the presence of Delta-8 and terpenes in product, 605 notes that the rule referenced by the DOH (S.D. Admin. R. 44:90:05:02) applies only to cultivation facilities, and that the violation referenced by the DOH was through 605’s manufacturing license.
605 says that while the product did contain Delta-8, as previously explained, it was naturally occurring, not added to the final product.
Finding 7 – The material noncompliance with inventory recordkeeping for transfer, testing and transaction records.
605 says that it provided the DOH with the alleged missing tests, and that it advised the DOH of a known issue with the department’s own chosen tracking system, METRC, which has resulted in test results not “linking” to the final products entered into the METRC system.
Finding 11 – The failure to secure facility with permanently fixed security cameras.
605 says that a blind spot in their camera network was found during the inspection, and that a new camera had been installed to address the issue.
Finding 12 – The failure to provide computer access to cameras or to verify the recording ability of the camera system.
605 says that during the inspection, camera footage was shown to inspectors on a mobile phone. While computer access to the camera footage was not available at the time, 605 contends that S.D. Admin. R. 44:90:04:08 does not explicitly state that access must be provided by computer, and believes the violation was improperly issued.
Finding 20 – The failure to provide pesticide application certification for agent applying pesticides.
605 says they advised the DOH that no pesticide products requiring a pesticide applicator were being used by the facility, and that they believe the violation was issued in error.
Finding 21 – The failure to provide food service establishment license for manufacturing edible cannabis.
The company says they have provided the DOH with a copy of the Food Manager Certification alleged to have been missing in the inspection.
They say the confusion about the issue was due to knowledgeable staff who could have provided the documentation not being present at the time, and that the violation was issued in error.
605 Cannabis says it has attempted to negotiate a settlement with the DOH, but have been unable to reach an agreement, believing that the primary barrier involves disagreement between 605 and the DOH on the issue of the presence of Delta-8 and terpenes in medical cannabis.
The company alleges that the DOH has inaccurately interpreted medical cannabis laws, failed to follow applicable laws pertaining to inspection of facilities, failed to communicate internally, and has a fundamental lack of understanding related to the cannabis plant and the process by which medical cannabis extractions are performed.
In their complaint, 605 claims a loss in revenue of $1,300,000 from the suspension of its manufacturing and cultivation licenses, and says its rights have been violated as a result of the DOH misapplying and/or circumventing proper rulemaking procedures.
605 also says the DOH has violated S.D. Admin. R. 44:90:12:01 by failing to produce test results for the product taken during the inspection, despite requests from the company.
The department shall provide an establishment the results of any analytical tests performed on samples taken from the establishment and shall inform the establishment whether the cannabis or cannabis products from which the samples were taken are nonusable.44:90:12:01
605 says the actions already taken by the DOH have caused irreparable harm to the company in relation to lost profits and damage to its reputation, noting that it has had to lay off employees due to the inability to operate, and saying it is at risk of going out of business.
The company is seeking a declaratory ruling by the court on the allegations it has made in the complaint against the DOH, an injunction to allow them to continue doing business while the lawsuit proceeds and monetary damages to be determined at trial.
In a statement provided to KELOLAND News, 605 Cannabis co-founder and CEO Ned Horsted said, “we regularly sought guidance from the Department when there were questions about procedures and always followed the guidance provided.” He also said that every product that left the 605 facilities passed testing in accordance with all laws and administrative rules.
The company says that they have fully complied with the DOH throughout the process, voluntarily recalling the products identified by the DOH. They maintain that no products pose a risk of health and safety to the public.
KELOLAND News has also reached out to the DOH for comment on the lawsuit and the various allegations made by 605 Cannabis. At time of publishing, we have not received a response.