Difficult State and Native Hashish License Denials: Present Traits and Points

Visitor submit by Robert Becher, Chairman of Quinn Emanuel’s Hashish Litigation Observe Group, and Carrie James, Affiliate

Candidates denied licenses or permission to function a cannabis-related enterprise have challenged unfavorable determinations in a wide range of methods. One frequent foundation for difficult the denial of a license or different type of permission to function a cannabis enterprise (“ cannabis license”) has been to argue that the foundations governing the grant of licenses have been utilized in an arbitrary and capricious method. Litigants have additionally challenged cannabis license selections by alleging that the method was corrupt. This text focuses on a few of the extra frequent challenges to cannabis license selections and what could be realized from the outcomes thus far.

Challenges Alleging Arbitrary and Capricious Software of the Licensing Scheme

Many lawsuits difficult selections granting or denying cannabis licenses embody a declare that the federal government division empowered to grant or deny cannabis licenses (the “division”) utilized the statutory scheme and/or its personal guidelines in an arbitrary and capricious method. The arbitrary and capricious normal varies by jurisdiction however typically seeks to find out whether or not the division lacked adequate justification for its actions and/or selections primarily based on the information and circumstances of the case. Circumstances making use of this normal have concerned points corresponding to whether or not a profitable applicant supplied all the required paperwork to qualify for consideration or whether or not a division thought-about adequate proof previous to denying a license.

Of the instances which were appealed, the courts typically have sided with the division over a disenchanted applicant. Though the courtroom selections thus far have centered on compliance with the state and native statutory schemes, they’ve given substantial deference to the related division’s interpretation of the statutory scheme, besides the place such interpretation conflicts with state or federal constitutional provisions or exceeds the division’s energy.

As an example, two instances, one in Arizona and one in Nevada, allege that the related departments acted arbitrarily and capriciously by granting a cannabis license to their competitor regardless that the competitor failed to offer the requisite paperwork exhibiting compliance with native zoning legal guidelines. In every case, the courtroom discovered that the statutory scheme—and the division’s interpretation of it—allowed for the licenses to be granted absent that paperwork.

In Compassionate Care Dispensary, Inc. v. Arizona Dep’t of Well being Servs., 244 Ariz. 205 (Ct. App. 2018), the applicant challenged the division’s grant of a cannabis license to its competitor on the grounds it had not procured a conditional use allow from the native municipality permitting the competitor to function its cannabis enterprise. The courtroom held that as a result of the related legal guidelines didn’t in truth require a conditional use allow on the utility stage however solely required a exhibiting of compliance with native zoning legal guidelines, the division didn’t act arbitrarily and capriciously in granting a license to the competitor.

Equally, in Nuleaf CLV Dispensary, LLC v. State Dep’t of Well being & Human Servs., Div. of Pub. & Behavioral Well being, 134 Nev. 129 (2018), two medical marijuana corporations—GB Sciences, LLC and Acres Medical, LLC —challenged the grant of a license to Nuleaf CLV Dispensary, LLC (“Nuleaf”) as a result of its utility didn’t comprise a allow exhibiting it was in compliance with native zoning legal guidelines. The courtroom discovered that the statutory requirement for the allow was ambiguous and decided that the Nevada Division of Well being and Human Companies may subject a provisional license topic to Nuleaf acquiring the zoning allow. Litigants looking for to problem their rivals’ purposes ought to overview whether or not the statutory scheme requires particular forms of paperwork be included within the utility or not, in addition to how the necessities perform holistically.

In New Jersey, there even have been unsuccessful challenges to the division’s preliminary licensing utility course of. In re Inst. for Well being Analysis & Abunda Life Ctr., 2013 WL 4458982 (N.J. Tremendous. Ct. App. Div. Aug. 22, 2013), concerned two low-scoring candidates—Institute for Well being Analysis and Abunda Life Heart, and Abatin Wellness Heart. They challenged the Division of Well being and Senior Companies’ (“DHSS[’s]”) issuance of licenses previous to the formal adoption of the rules governing purposes. A 3rd, high-scoring applicant, Backyard State Medical Marijuana Associates, Inc. (“GSMMA”), challenged the usage of geographical range as a foundation to disclaim its utility in favor of the following ranked applicant. The courtroom discovered that the DHSS acted inside its statutory authority that (1) permitted it to pursue granting licenses previous to the formal adoption of rules; and (2) directed it to make sure adequate entry to medical marijuana throughout New Jersey. Additional, the courtroom particularly declined to handle GSMMA’s argument that it was higher positioned to serve extra individuals in New Jersey than its profitable competitor, as a result of doing so would require the courtroom to substitute its personal judgment for the DHSS’s findings on that subject.

Nat. Med., Inc. v. New Jersey Dep’t of Well being & Senior Servs., 428 N.J. Tremendous. 259 (App. Div. 2012), is comparable. Pure Medical, Inc., a for-profit entity, challenged the restrict of the preliminary license grant to 6 non-profit entities. The courtroom decided that such limitation met the statutorily-required minimal variety of licenses and sort of amenities and was an inexpensive method to the preliminary grant of licenses.

A Colorado problem on the idea that the related division failed to think about sufficient proof earlier than denying an applicant a license and subsequently acted arbitrarily and capriciously was additionally unsuccessful. In Rocky Mountain Retail Mgmt., LLC v. Metropolis of Northglenn, 2017 CO 33 (2017), the unsuccessful applicant asserted there was not substantial proof to justify town’s resolution to disclaim its utility for a license. The Colorado Supreme Court docket discovered that the kind of proof thought-about by town was in step with the statutory scheme for a cannabis license and thus was adequate to help the denial of the license. The Court docket didn’t require a specific quantum of proof, though it famous that the Metropolis Council held two hearings and the events introduced important proof. As a substitute, the Court docket centered on whether or not town thought-about proof for every class outlined within the metropolis code—right here, quantity, sort and availability of amenities in addition to different related data—and located that it had.

Though courts incessantly have discovered to this point in favor of the division or entity that made the choice to grant or deny a cannabis license, the end result was completely different in a go well with the place the division reversed its personal resolution with out offering an applicant a possibility to treatment subsequently found defects. In Medical Marijuana of Mass., Inc. v. Barlett, the Massachusetts Division of Public Well being confronted public stress attributable to newspaper studies about issues with its licensing course of and revoked a license granted to Medical Marijuana of Massachusetts (“MMM”) regardless that it was the very best scored applicant after the primary overview. The division’s most important justification for the revocation was that MMM paid a excessive proportion of charges to administration. After the revocation, MMM minimize the charges paid to administration in half. The courtroom discovered the division had acted improperly by conducting a second, unplanned overview of the appliance, discovering defects and never offering MMM a possibility to treatment. As well as, the courtroom famous that the division had accepted cannabis licenses for different entities with comparable enterprise buildings. See Shelley Murphy, “Decide orders marijuana licenses restored,” BostonGlobe.com (Apr. 28, 2015); see additionally Docket, Medical Marijuana of Mass., Inc. v. Barlett, Case No. 1484CV02722, (final visited Aug. 20, 2019). Litigants contesting a denial of their utility ought to subsequently take into account whether or not the related division subjected their utility to evaluations that weren’t sanctioned by the common licensing course of.

Challenges Based mostly on Technical Errors

Candidates have been profitable in difficult licensing selections the place the related division dedicated a technical error in evaluating the appliance. As an example, in Las Vegas, the place candidates are ranked by rating, Acres Medical, LLC succeeded in altering its rating from within the thirties to quantity 13 by submitting go well with towards the Nevada’s Division of Well being and Human Companies and exhibiting that the division had omitted factors from its ultimate rating. See Nuleaf CLV Dispensary, LLC v. State Dep’t of Well being & Human Servs., Div. of Pub. & Behavioral Well being, 134 Nev. 129, 131 (2018) (describing Acres Medical LLC’s separate lawsuit).

In Michigan, unlicensed dispensaries efficiently delayed the closure of their companies for 2 weeks by arguing that they have been denied licenses because of the state erroneously recording their tax funds. See Amy Biolchini, “Michigan choose thwarts crackdown at 50 unlicensed medical marijuana retailers,” MLive.com (Mar 29, 2019), michigan-judge-thwarts-crackdown-at-50-unlicensed-medical-marijuana-shops.html. On April 30, 2019, the state of Michigan was ordered to not shut the dispensaries till it reviewed every of their purposes and made a dedication. See Amy Biolchini, “Michigan Decide Slams State for ‘Freakish’ Regulation of Medical Marijuana Companies,” MLive.com (Apr. 30,2019).

Challenges Based mostly on Corruption Allegations: An Space To Watch

Alongside different allegations, disenchanted candidates have alleged various levels of corruption on this course of. Litigants have accused state and native officers of (i) working a pay for play licensing scheme; (ii) awarding licenses to entities whose attorneys wined and dined them whereas denying licenses to entities who didn’t; and (iii) colluding with a profitable applicant to create a monopoly and awarding a license with none public decision-making course of.

There are at the very least two pending instances the place the occasion difficult the choice has alleged corruption. The primary is a San Bernardino, California go well with alleging that profitable licensees donated to the mayor’s reelection marketing campaign as a part of a pay for play scheme. See “San Bernardino says no to discovery in Hashish lawsuit,” IEBusinessDaily.com (Apr. 26, 2019). If this problem succeeds, future litigants can take into account their rivals’ political donations as a foundation to problem a license resolution.

The second case entails almost forty candidates that have been denied licenses in Nevada. Throughout the three-month-long injunction listening to, Jorge Pupo, deputy government director of the Division of Taxation, admitted to having lunches and dinners with an legal professional, Amanda Conner, who represented dispensary house owners. Three of Ms. Conner’s shoppers in the end procured licenses. Though Mr. Pupo denied that the appliance course of was tainted as a result of he joined Ms. Conner for meals, he admitted that he was conscious on the time of the meals that Ms. Connor represented cannabis corporations. See Related Press, “Official denies lawyer outings skewed Nevada pot licensing,” APNews.com (June 21, 2019); Bryan Horwath, “State cannabis official reaffirms equity of utility course of in his final day on stand,” LasVegasSun.com (July 1, 2019). In later testimony, he continued to defend his exchanges with Ms. Connor, together with electronic mail exchanges concerning the appliance. See Michaela Chesin, “High State Marijuana Regulator Questioned Once more in Dispensary License Case; Winners Say They’re Dropping Cash Amid Court docket Delays,” TheNevadaIndependant.com (Aug. 14, 2019). Future litigants can take into account the relationships authorities officers need to their rivals or their rivals’ attorneys.

In opposition to this backdrop, on August 15, 2019, the Federal Bureau of Investigations (“FBI”) launched a brief podcast claiming that it noticed a menace of public corruption rising with the enlargement of authorized marijuana, stemming from the excessive worth related to marijuana licenses. The FBI requested for ideas into any “illegally obtained licenses” or suspected public corruption. “FBI, This Week: Public Corruption Risk Emerges in Marijuana Business,” FBI.gov (Aug. 15, 2019); see additionally Tom Angell, “FBI Seeks Ideas On Marijuana Business Corruption,” Forbes.com (Aug. 16, 2019). Ought to the FBI pursue corruption fees towards state officers, disenchanted candidates may bolster their corruption-related challenges to a division’s licensing selections.

Conclusion

Based mostly on the licensing challenges alleging an arbitrary or capricious resolution which were thought-about by appellate courts thus far, courts have incessantly sided with the related division besides the place some critical error or omission occurred within the licensing course of. Challenges involving technical errors that alter an entity’s rating or result in denials have encountered higher success. Corruption—or the looks of corruption—within the licensing course of stays a wild card within the licensing problem deck.

¹The Governor disbanded the licensing board, and licensing was then transferred to the Michigan Marijuana Regulatory Company, which has been capable of course of purposes extra shortly than the board. See Amy Biolchini, “Michigan Speeds Up Medical Marijuana Licensing As Leisure Launch Looms,” MLive.com (June 13, 2019), https://www.mlive.com/information/2019/06/michigan-speeds-up-medical-marijuana-licensing-as-recreational-launch-looms.html.
²http://iebusinessdaily.com/san-bernardino-says-no-to-discovery-in-cannabis-lawsuit/
³https://www.washingtontimes.com/information/2019/jun/21/official-denies-lawyer-outings-skewed-nevada-pot-l/?utm_source=electronic mail&utm_medium=enl&utm_campaign=higherlaw&utm_content=20190627&utm_term=legislation
⁴https://mjbizdaily.com/colorado-man-sues-town-alleges-it-created-mmj-monopoly/
⁵Currently, discovery is stayed till the courtroom points an order on town’s movement to bifurcate, which stays pending. Minutes. Mot. to Bifurcate, Washington, LLC v. Metropolis of San Bernardino, et al., Case No. CIVDS1905710 (Aug. 2, 2019), out there via http://openaccess.sb-court.org/OpenAccess/.


In regards to the authors:

Robert Becher is a associate with Quinn Emanuel and the Chair of its Hashish Litigation Observe Group..  He has represented each plaintiffs and defendants in high-stakes enterprise litigation and arbitration issues for over twenty years.

Carrie James is an affiliate with Quinn Emanuel.  Along with litigating civil disputes in state and federal courts, her follow contains white collar protection and inner investigations.

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