Cannabis companies, particularly multistate operators (MSOs), are increasingly incorporating lawsuits into their licensing application strategy in a bid to secure a permit in a highly sought-after market.
That strategy of preparing to fight license rejections by state regulators, especially those lost by a narrow margin, is based on a number of factors:
- Many marijuana business applicants in markets across the country have won licenses by appealing or filing lawsuits targeting the initial awards handed out by regulators. In Florida alone, 17 of 22 medical cannabis license holders won their vertically integrated permits through legal challenges.
- Companies figure that if they’ve already spent roughly a half-million dollars to apply and secure locations, what’s another $50,000 or so to appeal a decision?
- There’s a belief that the initial scoring process was biased or corrupt.
“You can almost look at every state and there’s some type of challenge,” said Michael Mayes, CEO of Quantum 9, a Chicago-based cannabis consulting firm.
“It’s definitely part of the (licensing application) strategy.”
Mayes said that since applicants typically raise lots of money to apply for a license, it pays for an unsuccessful applicant to use some of the money to “delay the process, to try to infiltrate the corruption and, in some markets, it surprisingly works.”
Jeremy Unruh, director of public and regulatory affairs of PharmaCann, a Chicago-based multistate operator, agreed.
Unruh said it’s the realization that an application “isn’t the end of the game.”
“There is a strategy that many applicants undertake,” he said, “and that is to challenge the scoring and hopefully the entire process” in hopes of winning a license or changing the law to allow additional licenses into a market.
MSOs more likely to plan for legal challenges
Multistate operators are most likely to build the strategy into the application process because they generally have deeper pockets to hire litigation attorneys and have experienced similar licensing issues in other states, Unruh said.
“The takeaway is whether an applicant has the foresight to anticipate the situation,” he noted.
“MSOs do. And their investors probably want to see it (the legal challenge).”
Litigation attorneys and other consultants are brought in to help figure out not only the best tactics for winning a license, but to develop a strategy to fight a possible rejection – based on the rules, regulations and application scoring system of the particular state.
Mayes and Unruh both mentioned Maryland’s first medical cannabis licensing round in 2017 as one of the triggers for the strategy.
Green Thumb Industries (GTI), a Chicago-based MSO, won a license after filing a suit claiming it lost a cultivation license to a lower-scoring competitor.
In addition, claims of corruption and a lack of minority representation actually led Maryland lawmakers to expand the number of cultivation and processing licenses.
“After Maryland, it became clearer that the path of getting a license is bigger and longer than the application process itself,” Unruh said.
Other recent examples of successful challenges include:
- GTI won a medical marijuana cultivation license in Ohio in August after a successful appeal to the state.
- Earlier this year, Trulieve settled a lawsuit against Florida’s medical marijuana regulators and, in the process, won the right to open 49 dispensaries, 14 more than the cap of 35.
- Atlanta-based Surterra Wellness claimed it should be treated the same as Trulieve, and, in August, Florida state officials agreed.
Regulators can be own worst enemy
Legal challenges to license decisions are pending across the country – notably in Nevada over recreational MJ licensing and Arkansas over MMJ licensing.
Regulators in part have contributed to their own problems, Mayes said.
Many states didn’t hire independent third-party scorers, leaving them open to charges of bias and corruption. In part, state officials might not have fully understood the weight of their decisions.
Arkansas turned to an independent dispensary application evaluator after receiving heavy criticism for the way it handled cultivation-license applications.
Limited licensing in most cannabis markets also contributes to claims of bias and corruption.
“The licenses tend to be more valuable, so there’s more at stake,” Unruh said.
“My take is that, where there’s money and limited licensing, there’s corruption,” said Donna More, a partner in Fox Rothschild’s Chicago law office.
“Like any other industry, honestly.”
More was reacting to the news that the FBI is investigating public corruption in the cannabis industry.
Said Mayes: “There seems to be widespread corruption in the industry when it comes to awarding licenses.”
Not every cannabis business believes it’s necessary to plan for legal challenges before an application is scored.
Kris Krane, president of 4Front Holdings, a cannabis consulting firm and multistate operator, said his Phoenix-based firm hasn’t adopted such a legal strategy in the application process itself.
But, he said, if a company falls just short of winning a license, then they are “much more likely to look for inconsistencies or convince themselves they have found them.”
“It’s part of the calculus,” Krane said.
Meanwhile, states increasingly are looking for ways to stay out of litigation, Mayes said.
Those strategies include hiring a third-party evaluator with subject matter experts who grade each application blindly – in other words, without knowing the identity of the applicant.
State regulators also increasingly are methodically spelling out the appeal process in the industry rules and regulations.
In Pennsylvania, for example, a company filed suit to invalidate the state’s entire medical marijuana application process, which would have thrown the nascent industry into chaos.
But an appellate judge ruled that the company, Keystone ReLeaf, should have first sought a remedy with the state.
Jeff Smith can be reached at [email protected]