Article by: Partner Christopher Parrington

In 1996, California became the first state to legalize medical marijuana. Sixteen years later, Colorado and Washington legalized recreational cannabis. The industry has since exploded. To date, 19 states have legalized recreational cannabis. Eighteen states have  legalized medical marijuana,  and  10  states have  legalized  cannabidiol (CBD) or low-THC cannabis.

In the last 26 years, state leaders have had ample opportunities to evolve, enact and implement cannabis legislation and regulations from the states before them. However, too often history shows that new plans can fail to avoid the prior challenges and instead further complicate the cannabis  industry’s efforts to be as fully functional as  other industries.

This article discusses three critical focus areas when drafting cannabis legislation: social equity, licensing, and how new cannabis products will be regulated.

Social Equity

Many state regulatory regimes have included a social equity component designed to help underprivileged individuals, minority groups, and those who have been disproportionately impacted by prior cannabis laws. While program structures differ greatly, new states regulating cannabis can learn much from prior social equity programs,  depending on the goals they are   designed  to accomplish.

According to the National Association of Cannabis Businesses, “the goal of social equity laws is to ensure that people from communities disproportionately harmed by marijuana prohibition and discriminatory law enforcement are included in the new legal marijuana industry.” This can be achieved by making it easier for social equity candidates to have access to cannabis licenses or employment opportunities, the two most common goals of social equity programs. Judicial reform, encouraging—or even mandating—reinvestment into adversely affected communities, and earmarking licenses for certain groups are  other common measures. States that succeed in social  equity have a combination of  these   components.

Florida implemented a unique approach to social equity. Florida guaranteed a license to a recognized class member of lawsuits (Pigford Litigant) involving claims that the US Department of Agriculture discriminated against African American farmers in the 1980s and 1990s.

While laudable in theory, the practical effect of this policy presented numerous challenges. For example, most of the Pigford Litigants were not experienced with cannabis, were retired, or were simply no longer alive when the licensing priority took effect. The result was that licenses became available for those who did not want them or lacked the experience to properly use them.

This caused large multi-state operators and wealthy individuals to recruit Pigford Litigants for their applications, often structuring business relationships poorly for the Pigford Litigant, the program’s intended beneficiary. Reserving the Pigford Litigant license also resulted in significant litigation, causing delays and setbacks in the program designed to enhance Black farmers’ ability to obtain a cannabis license and operate in an expedited manner.

Michigan has a different approach. To qualify for Michigan’s social equity program, individuals must first be eligible by meeting certain qualifying criteria, such as residing in a disproportionately impacted community or having a prior cannabis- related conviction. Once deemed eligible, the cannabis business is entitled to benefits such as reductions on licensing fees depending on where  it is located.

In 2021, the Michigan Cannabis Regulatory Agency also announced the creation of its Joint Venture  Pathway Program which connects eligible social equity participants with current licensees, potential licensees or others through joint ventures, mentorships, incubator programs, or employment. While Florida focused on providing a select group with an opportunity for license ownership, Michigan focused on improving entire communities  through  employment opportunities, community outreach, and the JVPP. Illinois’ application process was similar in that it automatically awarded points to social equity applicants. However, the number of social equity applicants who were qualified for a  license exceeded the number of licenses available, causing qualified social equity applicants to not receive a license  and  not benefit from the program.

New York took another unique approach. Governor Kathy Hochul recently announced the state’s selection  of  a minority-  led investment team to sponsor  and manage  a $200  million  New York  Social  Equity Cannabis Investment Fund, designed to help create cannabis  jobs and other opportunities for those harmed most by prior  cannabis laws.

For new cannabis states, social equity could include elements of programs implemented in other states. To have the most impact, new social equity initiatives should address both cannabis business ownership and cannabis industry employment opportunities for those belonging to disproportionally-affected communities. States can also provide educational and training assistance to new industry members. Community involvement, outreach and give-back programs are also vital, whether as  part of  the application process  or through tax or application fee benefits to those giving  back.

Finally, the enactment of expungement laws can promote social equity so that Americans won’t remain imprisoned for cannabis-related crimes, while other individuals are growing, manufacturing, selling, and possessing cannabis legally under state law.

Licensing

Cannabis business licensing frameworks vary greatly throughout the US. Most have limits on the number of licenses that may be issued, the number of licenses one may hold, and who can hold those licenses. Several also allow local governments to regulate cannabis through the issuance of additional licenses. Although there is no perfect way to license cannabis businesses, new states can  learn a lot about licensing from what others have done in the   past.

In many states, licensing is highly competitive. In Missouri, less than 200 licenses were authorized for medical dispensaries, 60 for cultivation, 86 for manufacturing and 10 for transportation, even though more than 2,000 applications were submitted for these licenses. In Illinois, only 75 dispensary licenses, 40 processing licenses and 40  craft grower licenses were initially authorized, but the state subsequently authorized 110 more for dispensaries, 60 more for processing and 60 more for craft growers.

The competitive application process in Missouri and  Illinois  ultimately proved less  than  ideal. Applicants spent hundreds of thousands of dollars to prepare and apply for the limited licenses, only to either lose out in a lottery process or  be forced to commence litigation because of a flawed scoring process. In Illinois, a perfect score on a cannabis application gave a dispensary applicant the opportunity to be part of a lottery for a license. In Missouri, more than 800 applicants filed appeals after being denied a license, with many  alleging inconsistencies in how identical applications were    scored.

A competitive licensing application process creates potential for numerous problems. If scorers are not given enough criteria and direction to evaluate each application, then the result could be like Illinois, where the number of perfect application scores exceeds the number of available licenses and many of the qualified are left emptyhanded. If scorers are given too much discrepancy, the opposite can result, like in Missouri where individual scorers have been accused of providing drastically different scores on identical applications depending on who did the actual scoring. Unfortunately, both extremes are likely to result in significant litigation, which means delays for those awarded licenses, and in medical states, delays in patients receiving the medicine they greatly need.

Unfortunately, the other side of the spectrum is not a suitable solution either with Oklahoma being a great example. In 2018, Oklahoma legalized medical marijuana but did not limit the number of licenses and had minimal requirements to be eligible. Without limits, Oklahoma has issued more than 12,600 total licenses for its population of 3.9 million including  more than 8,600 grower and  more than 2,300 dispensary   licenses.

For comparison, Colorado, with a population 1.7 greater than Oklahoma, issued only 1,200 total cultivation licenses. Oklahoma County has three times more licensed dispensaries than the City of Denver, despite having similar-sized populations. By not limiting licenses, the medical marijuana industry in Oklahoma has become diluted and unstable. Resources are wasted on licensing and infrastructure for non-operational businesses, causing low-quality cannabis to flood the Oklahoma medical market, opening the door for illegal trafficking of cannabis into neighboring states to dispose of excess cannabis not being sold in Oklahoma. In response to these issues, Oklahoma enacted a two-year  licensing moratorium  that  began in August 2022.

One of the best frameworks for licensing can be found in California. In California, licenses are issued at the state level, and although it is not a competitive application process, the licensing standards are high. According to the California Bureau of Cannabis Control, there are only 1,068 active retail cannabis storefront licenses in California as of August 2022, despite a population of more than 39 million. Additionally, municipalities may limit the number and type of cannabis businesses within their jurisdictions. In California, 61% of municipalities do not allow any recreational cannabis businesses, while 56% of municipalities do not allow any type of cannabis business. Ultimately, this combination of state and local licensing ensures that only qualified candidates are licensed and leaves flexibility to issue the number of licenses as communities deem necessary.

Regulating New Products

The rapid evolution of alternative cannabis products proves to be another regulatory challenge. This evolution accelerated after the federal legalization of hemp under the 2018 Farm Bill, which defines hemp as any cannabis plant, or derivative thereof, that contains not more than 0.3% delta-9 THC on a dry-weight basis.

Following the 2018 Farm Bill, many states saw cannabis-like products being sold as federally legal hemp products. The development of hemp derivatives has resulted in products being available for purchase as hemp because they do not have more than 0.3% delta-9 THC, despite having characteristics similar to cannabis because of an increased amount of other types of THC, such as  delta-8 and  delta-10.

In states where cannabis is legal, cannabis businesses have complained about being highly regulated while retailers selling these hemp products are not subject to the same licensing and regulatory requirements. In response, some states have prohibited sale of these non-cannabis products outside of licensed cannabis dispensaries. In states that have not  yet legalized cannabis, there have been legislative efforts to ban or regulate these non-cannabis products for a variety of reasons,  but sometimes these efforts backfire.

In 2014, Minnesota legalized medical cannabis with significant restrictions. Minnesota only licensed two operators, mandating that each of them cultivate, manufacture and sell to patients at specific locations and on specific terms as dictated by the state. Minnesota has not legalized recreational cannabis; however, Minnesota saw a surge of delta-8 and delta-10 products following passage of  the 2018 Farm Bill.

In mid-2022, legislation was passed in Minnesota to create a regulatory framework over hemp-based products with high levels of delta-8 and delta-10 THC. This new law went into effect on  July 1, 2022, and mandated that these products only  be manufactured from hemp as confirmed by a certified testing facility; these products can only be sold to customers who are at least 21 years old; these products must be packaged in a manner that makes them inaccessible to children; and these products cannot be advertised, marketed, packaged or sold in a manner that infringes upon intellectual property rights of others or would be attractive to children. Minnesota’s new legislation does not require manufacturers or sellers of these products to obtain a  license.

The drafters of the Minnesota legislation intended to regulate products with high levels of delta-8 and delta-10 THC. However, the statute provided that an edible product may be sold for “human consumption” in Minnesota so long as it “does not contain any amount of any tetrahydrocannabinol” that exceeds 5 milligrams per serving or 50 milligrams per package. Although the intent was to regulate delta-8 and delta-10 products, the result was legalization of edible products that contain 5 milligrams of delta-9 THC on a per-serving basis as well, so long as that delta-9 THC is derived from hemp. More problematic is that these delta-9 THC products can now be sold anywhere, by anyone, at any time, because there is  no licensing  requirement for them to be manufactured or sold.

As a result of this legislative oversight, Minnesota went from one of the most restrictive cannabis states in the US to one of the most  unrestricted, effectively allowing for the sale of  edible delta-9 THC products without any licensing requirement   or other significant regulation. Given political pressures and disagreements, the only solution to fix this conundrum appears to be the passage of new legislation allowing for the full legalization of recreational  cannabis and creation  of  a licensing and regulatory framework over these products akin  to what is found in other recreational  cannabis states.

Conclusion

The cannabis industry is here to stay. Most states have already legalized cannabis for medical or recreational purposes. However, there are several states that have yet to join the movement to legalize for adult recreational purposes. Hopefully these states will consider what their predecessors have done, specifically regarding social equity, licensing requirements, and  emerging  cannabis products.

*This article was originally published on news.BloombergLaw.com