A brand new lawsuit sheds gentle on New York’s licensing of 10 medical cannabis operators in 2015 and 2016, elevating questions about how regulators scored the purposes and whether or not different unsuccessful candidates may elevate their very own authorized objections.

Fresh lawsuits may gradual the method of handing out extra MMJ licenses – at a time when state lawmakers and the governor are debating laws to approve a brand new adult-use program.

In its lawsuit filed Feb. 5 in Albany County Supreme Court, New York-based Hudson Health Extracts (HHE) claims that its MMJ software in 2015 merited a top-five rating if it weren’t for the state Department of Health’s “arbitrary, capricious, and irrational decisions.”

Such litigation isn’t uncommon in marijuana licensing, neither is the language of the allegations.

But what makes HHE’s case so putting is that the corporate seems to have had the credentials that might make for a profitable applicant:

  • $18.6 million of capital.
  • Experience producing medical cannabis within the extremely regulated states of Connecticut and Minnesota.
  • A analysis partnership settlement with Montefiore Medical Center within the Bronx.
  • $1 million spent to safe actual property, together with a contract for a producing website and dispensary leases.

Yet HHE ranked 13th amongst 43 candidates with a monetary standing rating of “average.”

If the corporate had obtained an “excellent” monetary rating, it could have gained a license.

HHE was based by Mitch Baruchowitz, managing associate of Merida Capital Holdings, a New York-based non-public fairness agency.

Among the marijuana corporations he co-founded had been LeafLine Labs, which gained an MMJ license in Minnesota, and Theraplant, which gained a medical cannabis allow in Connecticut.

It took years for HHE’s administrative attraction to the state of New York to be heard and determined.

Finally, in July 2019, Administrative Law Judge William Lynch dominated the well being division’s resolution to not grant HHE a license was appropriate, a place the state adopted in January 2020.

MMJ program strife

Since launching in 2016, New York’s medical marijuana program has skilled turnover involving half of its 10 vertical licenses. That partially is due to monetary difficulties afflicting the unique license holders.

Nine of the 10 present licensees are multistate operators (see chart above), with 5 having secured their licenses after buying them from a neighborhood firm.

Some of the MSOs are struggling financially, most notably Los Angeles-based MedMen Enterprises and New York-headquartered iAnthus. The latter went by means of a monetary restructuring in a Canadian courtroom.

Hudson Health Extracts argues in its lawsuit that “much of the dysfunction that currently bedevils New York’s medical marihuana (marijuana) program, in fact, stems from the Department’s award of registrations to companies … that lacked the operational competence and the financial resources necessary to build a capital-intensive cultivation facility, run a processing plant, and sustain four retail locations spread across the state, rather than to companies like HHE, which boasted both operational competence and prolific financing.”

HHE attorneys declined to remark past the lawsuit.

Jill Montag, public info officer for the New York well being division, wrote in an e mail to Marijuana Business Daily that the company “does not comment on pending litigation.”

Some claims stick out

Cannabis lawyer Rob DiPisa of Cole Schotz in New Jersey mentioned the go well with is persuasive.

But he added it’s value noting the appliance course of was six years in the past and New York’s first go at marijuana licensing.

Observers should be a “little empathetic,” he famous, as a result of regulators had been “tasking unsophisticated government officials with the responsibility to review very technical aspects in the applications.”

Still, DiPisa mentioned three issues struck him about HHE’s claims:

  • The lawsuit cites a correlation between the amount of cash corporations spent on lobbying native and state officers and those that obtained licenses. 
  • Assessing monetary numbers doesn’t require sophistication; it’s fairly black and white.
  • State regulators modified the way in which they weighted sure components, in keeping with the go well with.

The lawsuit cites an investigation by the Lower Hudson Journal News in 2017 that discovered the six corporations that spent probably the most on marijuana lobbying in New York all won MMJ licenses.

In the Journal News’ report, a state well being division spokesperson disputed the suggestion that cash influenced the licensing selections.

More lawsuits? 

If HHE is given a license on account of this problem, DiPisa mentioned, “others may view this as an alternative avenue to obtain a license, and then you may see more lawsuits and that could lead to the potential slowdown” of extra licensing akin to what’s occurred in New Jersey.

Avis Bulbulyan, CEO of Los Angeles-based cannabis consulting agency Siva Enterprises, is watching the go well with intently due to his work in making ready the unsuccessful license software in New York for the minority- and physician-led Alternative Medicine Associates (AMA).

If Hudson Health Extracts’ lawsuit is profitable, Bulbulyan mentioned, he needs to understand how the state will regulate for the truth that AMA ranked even increased than HHE within the software scoring.

Bulbulyan mentioned AMA, which has reserved its authorized rights, had the second-highest uncooked rating, however the weighted common “brought us to 12th.”

He mentioned “no other application process was as heavily detailed and involved and cumbersome” as New York’s. He emailed images of AMA submitting 10 banker’s bins of software supplies.

HHE’s lawsuit mentioned that the majority purposes had been greater than 1,000 pages and that the successful purposes averaged 2,000 pages.

“Whenever you get that detail, the scoring always becomes pretty arbitrary,” Bulbulyan mentioned.

‘Average’ monetary standing

New York’s medical marijuana regulation, the Compassionate Care Act, was enacted in July 2014.

Five vertical licenses had been awarded in July 2015, and 5 extra had been issued roughly a yr later from the unique pool of 43 candidates.

New York hasn’t granted any new MMJ licenses since.

The state has 140,000 registered MMJ sufferers and 38 dispensaries that may attain gross sales of about $250 million-$350 million this yr, in keeping with Marijuana Business Factbook.

By comparability, Florida, which didn’t open up its market to full-strength MMJ till 2017, has 491,370 sufferers, 315 dispensaries and is projected to succeed in $1 billion-$1.225 billion in gross sales this yr.

HHE was one in all not less than 15 unsuccessful candidates to request an administrative listening to.

Administrative hearings didn’t start till January 2018 – 2 ½ years after initial permits had been granted.

A consolidated listening to with seven petitioners, together with Hudson Health Extracts, ran by means of June 2018, then the instances had been separated and it was one other yr till the choice was made on HHE’s case.

Judge Lynch concluded that three well being division staff “credibly testified” that measures had been taken to foster consistency within the scoring course of.

HHE argues in its go well with that the state handpicked the three who testified, not less than 11 reviewers didn’t testify within the case and the corporate was barred from calling rebuttal witnesses.

Despite its warfare chest of $18.6 million, HHE was one in all 38 candidates that obtained the identical “average” rating for its monetary standing, in keeping with the lawsuit.

“In other words, the Department concluded (inexplicably) that HHE’s $18 million was equivalent to the zero dollars or negative balance sheets submitted by other applicants,” the lawsuit notes.

Had Judge Lynch merely corrected this “single, glaring mistake” and awarded HHE one level further for having “excellent” monetary standing, the corporate would have gained an MMJ license.

HHE’s lawsuit famous the state’s resolution to grant a license to Bloomfield Industries, which lacked capital, was headed by a 26-year-old with no earlier expertise and reportedly soon ran into financial difficulties.

Bloomfield was bought early in this system – in 2017 to MedMen.

One of the state’s software evaluators acknowledged within the HHE case that the reviewers didn’t have time to completely study all of the purposes as a result of they had been below stress to finish the method inside eight weeks.

“It was really just grabbing and scoring because we were under a tight timeline for doing this . . . we didn’t have the luxury of, you know, perusing these (applications) in a slow fashion,” the state well being division’s senior witness, Dr. Anne Walsh, testified.

Jeff Smith could be reached at [email protected].

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