As we arrive at the middle of June, the Illinois Department of Financial and Professional Regulation (IDFPR) has not issued any conditional adult-use cannabis dispensary licenses and, as we recently wrote about here, it may be a while before the licenses are issued. Nevertheless, those licenses will be issued eventually, and it is important that cannabis entrepreneurs begin evaluating their next steps. Earlier this month we discussed what entrepreneurs should do in preparation for receiving a license. But it is also important for entrepreneurs to consider and begin to plan for the possibility that they will not receive one of the initial 75 licenses. After all, over 4,000 applications were submitted by 700 different applicants, 600 of which applied under the state’s social equity program, and there may be as few as eight successful applicants for those 75 licenses.
The IDFPR is an administrative agency, and usually, individuals impacted by agency decisions need to exhaust their administrative remedies before proceeding to court. Oftentimes, that requires some sort of appeal to the agency itself. With respect to adult-use licenses, however, the state has moved in a different direction. In an emergency rule issued in December 2019 (68 Ill. Adm. Code 1291), the IDFPR sought to “clarify that unsuccessful applicants who wish to file suit against the Department should do so in court rather than first going through the administrative process before going on to court.” Although the emergency rule has expired, the state has proposed a permanent rule saying the same thing.
With that resolved, the next question is what sort of basis might there be to seek judicial relief upon the denial of an application. Each applicant’s situation is different, and there is no way to provide an exhaustive list of options. But there are common approaches as illustrated by applicants denied in other states. One basis for challenging the denial of a license has been to argue the entire process is systematically unfair or opaque. Another has been to argue that specific applications were graded in an arbitrary and capricious manner. A third has been to allege corruption.
In Nevada, for instance, the cannabis licensing agency (Department of Taxation) faced serious allegations regarding the propriety of its licensing regime. Denied applicants challenged the criteria and personnel used to score 462 applications and award 61 potentially lucrative licenses to 17 companies. The lawsuits complained that the selection process was not transparent and that bias led to the selection of winners and losers. The lawsuits forced a change in the law—Nevada passed Senate Bill 32 in October 2019 which “authorize[d] certain disclosures of information relating to an application to operate a marijuana establishment or a person who is licensed to operate a marijuana establishment, including, without limitation, the identity of an applicant and any owner, officer or board member of an applicant, the methodology used to rank applicants for a license to operate a marijuana establishment and the score assigned to applicants.”
In Florida the legislature decided to strictly limit the number of licenses for the medical cannabis business and require “vertical integration,” meaning that licensed companies are required to handle all aspects of the business, from growing plants to operating dispensaries. This structure resulted in the filing of numerous lawsuits, with some asserting that the legislature’s regulations and limitations were inconsistent with the will of the voters who approved the medical marijuana referendum. In July of 2019, Florida’s First District Court of Appeals affirmed that parts of the state’s current regulatory scheme are unconstitutional in Florida Department of Health v. Florigrown, LLC, Case No. 1D18-4471, 2019 WL 2943329 (Fla 1st DCA Jul. 9, 2019). The matter is now pending before the Florida Supreme Court. If the Florida Supreme Court agrees, there will be a significant shake-up in the Florida medical marijuana market, including the potential for the issuance of a significant number of new licenses.
In Maryland in 2016, the winners of medical marijuana licenses were almost all white, which generated questions from social equity advocates and others, as well as lawsuits alleging racial and geographic discrimination. The lawsuits triggered the Maryland Medical Cannabis Commission to investigate the process for issuing licenses and the state also decided to increase the number of licenses available for minority businesses in a second round. That second round of licenses has been plagued with similar problems, however, and we expect litigation to continue in the state going forward.
The upshot from the experience in other states is that there are plenty of potential legal avenues to pursue if one does not feel they received a fair shake in the license application process. That said, there are many pitfalls, and lawsuits certainly have had only mixed success. Many courts are reluctant to come down too hard on regulators who are trying to balance so many competing concerns in a highly competitive process. Our recommendation is that when Illinois announces its licensees, review all information provided to you from the IDFPR and gather as much information as possible from other sources. Then try to evaluate why your application failed and how you stacked up to those who were awarded a license. If that information suggests that you did not receive fair treatment, consult with an attorney about the prospects for success and the risks and rewards of moving forward with litigation. We are here to help answer any questions you may have.
Please check our blog for continued updates on developments affecting the cannabis industry.