What Maryland Tells Us About the Future Of Competitive Cannabis Licenses

Several weeks ago the Maryland Medical Cannabis Commission finally announced the top scoring applicants for the state cannabis grow and processor licenses.  These coveted licenses were awarded after an unusually long selection period that left many wondering if the wait would ever end.  For a great breakdown by the Washington Post of the companies selected for licenses, check out more information here.

Maryland’s decisions reflect one of the last competitive application processes as we have come to know them.  Both Ohio and Pennsylvania are on the horizon for a competitive medical cannabis application, and Arizona is shuffling through the 750 lottery applications they received for 31 licenses, but we most certainly are at the beginning of the end.

On the heels of similar decisions in Hawaii, Florida, New York, Minnesota, and others before them, what commonalities can we see in the results?

  1.  $$$.  For starters, there is no doubt these hyper-competitive processes require significant cash.  Non-refundable application fees of $25,000 and annual licensing fees of up to $200,000 set the stage for the kinds of resources that are required.  But these fees pale in comparison to the costs of establishing large-scale cannabis growing operations that can exceed $10,000,000 per facility.  If your team scrounges up the bare minimum financial backing required by regulators, chances are you will not be awarded a license.
  2. White Males.  There is no disputing that the competitive medical cannabis states have been sorely lacking in racial and gender diversity among their leadership.  As someone that helped create scoring systems to incentivize minority ownership among applicants in Illinois, it is an issue that I care deeply about.  There is no arguing that, so far, we have collectively failed to create industry ownership that recognizes and empowers those communities most harmed by the decades-old War on Drugs, let alone reflect the populations these medical cannabis businesses serve.  Kudos to Pennsylvania for including a mandatory diversity plan in their medical cannabis law and draft regulations.  For more context about minority leadership in the cannabis industry, check this out.  Hopefully this will not reflect a long-term trend (no disrespect intended for my fellow white guys out there).
  3. Local Ownership and Local Support – Regardless of whether your core team is born and raised locally, a recurring theme across these competitive states is that local investors and local community support are mandatory.  Some states have delegated a virtual veto-power to local towns that do not want cannabis businesses in their backyard (see Massachusetts).  Hawaii was an unusually residency-centric application process, and Florida set the eligibility bar by requiring floral nurseries with 30+ years experience growing plants.  As Ohio and Pennsylvania develop their regulations, expect explicit and implicit requirements for local support.  Any applicant struggling with local zoning needs to find a new town to hang a shingle.
  4. Selection Processes Work, But Are Messy – A fundamental question government regulators face when there is a limited number of licenses to award: “how do we pick winners and losers?”  If there is a better way than a merit-based, competitively-scored selection process, I’ve never seen it.  I take issue with the lottery system used in Arizona (trust me, watch this video), which means someone, somehow has to pick something approaching 1 winner for every 10 applicants.  Others have suggested an auction to the highest bidder (see #1 and #2 for why that’s problematic).  The odds vary depending on the state, region, type of license, etc., but ultimately a process must be created for licensees to be chosen.  The best selection processes have transparency (the public is informed about the process, clear articulation of the point system, criteria are plainly identified) and do absolutely everything imaginable to protect against actual or appearances of impropriety at a time when the public automatically distrusts government and assumes shady dealings.  Each selection process going back to Massachusetts and Connecticut have drawn criticism and lawsuits, but they have also generally identified the better (if not best) applicants in the pool.
  5. Building the Most Experienced Team – One trend that has received less attention is the increasing premium placed on an exceptional team of experts.  Consider, if you will, an applicant with $5 billion in assets and billions in debt (let’s call him Blonald Lump).  Mr. Lump has a decent grower from a recreational cannabis state who has been growing cannabis “for 30 years” (you do the math) and several former Wall Street bankers.  If Mr. Lump is facing a team with $7.5 million cash on hand, deep and longstanding ties to the local community, a cultivation and processing team that has years of experience in legal markets and an unblemished record, a nationally-recognized former law enforcement officer, and business executives from multiple industries, Mr. Lump loses even though he is used to “winning.”  Applicants are increasingly becoming more sophisticated in writing a great application narrative that appeals to regulators – and it is starting to all blend together.  The narrative itself is not a great way to choose licensees – it is the substance behind the applicant, and the experience of the team members that states are increasingly using to pick the best of the best.
  6. There Is No Guarantee, No Silver Bullet – If anyone ever guarantees you a license prior to a competitive merit-based selection, run in the other direction.  Applicants that were very successful in previous medical states often fail to get a license in future states.  Consultants that work with 10 teams in a state that issues 5 licenses is not likely to win any licenses for their clients.  Each state has been unique, and you need to take the time to understand the culture of the state, the intentions behind the regulations, and the goals behind the selection criteria.  Each new state looks to those that came before them for best practices, and traps to avoid.  I spent time speaking with every single medical cannabis program that came before Illinois, and I guarantee you new regulators in developing states will do the same.  Each state puts its own stamp on their program, and what worked in one state 6 months ago very well could hurt you in the next application.

If you are looking to apply in Ohio or Pennsylvania, or any future competitive state – study the regulations, focus on your real estate, and build the strongest team that you can.  It is an exhilarating process competing for a medical cannabis license in an industry that is truly helping people, and I wish you all the best.

 

Compliance – for the regulators and regulated.

“Compliance” is a term that is thrown around – often without a clear definition of what it means, and how it matters.

I initially worked with “compliance” matters in my first job as a healthcare consultant.  Compliance plans are ubiquitous in healthcare, largely developing after audit and anti-fraud initiatives of the federal government in the 1990’s.  Today – most industries have ongoing compliance activities, compliance officers, and compliance plans.  Compliance can simply be a catch-all position to reduce risk for a company, and often uses employees without specialized compliance experience.  I am particularly partial to “How to get a job in compliance with little or no experience.”  At least they’re being transparent about it.

But true compliance needs are growing.  The Wall Street Journal thinks a Compliance Officer is one of the hottest jobs in America.  I’ll take WSJ’s word for it, but the topic itself tends to be boring and fall on deaf ears.

The truth is, compliance matters and should be taken seriously – especially in the developing cannabis industry with the variety of security, laboratory testing, packaging, record keeping, product tracking, and other regulatory requirements.  Compliance services are an increasing trend in the industry – most recently leading two of the country’s better known cannabis-focused law firms to jointly create their own compliance software for businesses.

While we’re at it, compliance matters not only for those being regulated, but for the regulators themselves.

Think of it as akin to the issue of “who is policing the police?”

When we were developing the Illinois medical cannabis program, there were dozens of issues to address every day of the week.  We dealt with the crises, but we were left with precious little time to consider how the implementation was going.

How would we establish benchmarks for success of the Illinois medical cannabis program?  How would we improve and modify the program moving forward?  How would cannabis businesses be able to share valid suggestions without the government disregarding them as self-serving?  How could Illinois learn from best practices of other states, and fix unanticipated problems, in the face of constant political, fiscal, and bureaucratic pressures?

“Compliance,” you say?  Indeed.

Some common compliance elements include effective communication, clear policies and procedures, monitoring program success and failures, appropriately responding to unforeseen or negative incidents, and general good management principles.  Of course these aspects are beneficial to a private cannabis business.

I would go so far as to say these elements are even more critical, and less common for government regulators and programs enforcing cannabis laws.  Government regulators don’t often have the time or training to implement successful compliance tools – that’s what outside consultants and compliance experts are for (here’s lookin’ at you, Wall Street Journal!).

Some states are already diligently tracking compliance markers for their medical and adult-use cannabis programs. Washington and Colorado have produced annual reports measuring a variety of benchmarks for their programs. Arizona went a step further with their medical program and hired a compliance consultant to conduct a comprehensive review of strengths and weaknesses of their medical marijuana system:

“The [Beacon-ID consulting] report recommends a state inventory tracking system, expanding patient registry systems to include faster and better sharing between physicians, regulators and dispensaries, standardized rules for packaging including child-proofing and increased inspections including unannounced ones.”

All state cannabis regulators should ensure a rational review of the successes and failings of their respective programs – especially those like Illinois where the program automatically sunsets January 1, 2018 without legislative renewal or expansion. We can all benefit from taking into account extensive data about the business, health, security, and quality of the state’s cannabis industry. The various state agencies must incorporate the tenets of compliance for us all to effectively evaluate next steps – we can’t just wing it and make emotional decisions about the future of these programs. A compliance plan is just one way for the regulators to track the successes and failures, and I hope such preparation and self-analysis paves the way for the continuation and expansion of the Illinois medical cannabis program.

Medical Cannabis Advisory Boards

On January 29, 2016, the Illinois Department of Public Health (“IDPH”) announced that Director Nirav Shah had once again rejected adding debilitating medical conditions to the Illinois Medical Cannabis Pilot Program Act (“MCPP”).

Though highly disappointing, this came as no surprise to those of us closely monitoring the words of Illinois Governor Rauner.  See hereHereHere.  And even his January 2015 comments here.

“I’m concerned about the process,” Rauner said today during a signing ceremony in Springfield.  “I don’t think it’s been run well.’

No offense taken.

The new Rauner Administration has been a mixed bag with regards to the medical cannabis program (on the bright side, cannabis businesses received their licenses, were allowed to initiate cultivation, and the program was allowed to start patient sales in November 2015 without any government obfuscation or inexplicable delays).

Yet the Illinois Department of Public Health, guided by the principles of Governor Rauner, has twice rejected the recommendations of the Medical Cannabis Advisory Board (“Advisory Board”) to expand the program.  The truly outstanding and overly qualified Advisory Board, comprised of doctors and patients, nearly unanimously urged IDPH to add new medical cannabis conditions such as PTSD and chronic pain.

advisory-board

The recommendations were rejected.  No explanation was given.  There is no reason to expect a different result in the future – you know that old saying about doing the same thing over and over again but expecting a different result…

While many of us are upset and disappointed about the news, I want to focus on the legal side of the ledger.

The Advisory Board is one of the better aspects of the MCPP – designed for the law to evolve over time.  [Full disclosure: I am also a former general counsel for IDPH, and was involved in the creation and appointment of the Advisory Board.]  As more medical cannabis research provides stronger justification for how it benefits PTSD, for example, IDPH has the authority to add the conditions through administrative rules (specifically through the Administrative Procedure Act and the Joint Committee on Administrative Rules).

Seems a bit boring, but wait… What if the Advisory Board recommends adding a condition to the MCPP and the IDPH says “no” to the recommendation?  Of course, that is exactly the situation we find ourselves in.

Not surprisingly, those who applied to add their medical condition are heartbroken, and some have even sued IDPH:

“An Illinois veteran is asking a judge to reverse a state decision against adding post-traumatic stress disorder to the list of diseases eligible for medical marijuana treatment.

“In the case of PTSD, the advisory board voted unanimously to recommend that it be added to the list after hearing testimony about the existing medical evidence.

“Potential patients ‘are disappointed in the governor for going against the recommendations of his own medical cannabis advisory board,’ [Attorney Michael] Goldberg said.  ‘The governor’s office has reversed the board’s recommendations without giving any reason, and they are seeking relief from the judicial branch.”

Can IDPH continue to refuse adding any conditions in the face of repeated Advisory Board decisions to the contrary?  Does IDPH need to give a reason for the denial?  If so, would any reason be legally sufficient?  What role, if any, does the Office of the Governor have?

Much of this will be addressed in court, so I’ll let those questions linger.  But we have some other states to take cues from.

Arizona’s medical marijuana law is one of the models for our program in Illinois, and also includes a Medical Advisory Committee to consider adding new conditions.  Arizona’s Advisory Committee recommended against adding conditions like PTSD in 2012 and again in 2014.  Based on these recommendations, their Director of the Department of Health Services denied the addition of PTSD citing “a lack of scientific evidence.”  When challenged in administrative review, the Department was ordered to reconsider and the Director ultimately acquiesced to adding PTSD as an eligible condition under their program.

“At the hearing, there was substantial evidence showing that PTSD sufferers receive a palliative benefit from marijuana use.

“The preponderance of the evidence shows that marijuana use provides a palliative benefit to those suffering from PTSD.”

Minnesota’s medical cannabis program closely mirrors Illinois program in many ways, including an advisory panel to consider new conditions.  Despite the panel recommending against intractable pain, the Minnesota Commissioner of Health decided to add the condition.

As disheartening as the gutting of the Advisory Board in Illinois may be, the Board still offers a unique and high-profile opportunity to present the litany of latest research supporting the medicinal benefits of cannabis.  The Advisory Board may not succeed at adding medical conditions any time soon, but it continues to be valuable and we all benefit from the Board’s thoughtful and passionate members.

If there is any takeaway from this, we should acknowledge that reasonable government officials and medical professionals can disagree on substantive decisions like adding eligible conditions to a medical cannabis program.  But when we are considering treatments for our country’s heroes returning from battle and suffering from PTSD, or solutions for millions of Americans battling chronic pain with addictive opioids freely prescribed by their doctors, we should not stand in the way of medicine that can improve their lives.