Jersey Clobbers “Cannabis Licensing Lawsuits” and launches Triumphant Adult Use Program

With the Eastern seaboard’s most ambitious Adult Use program primed to explode, New Jersey’s Superior Court Appellate Division (“Appellate Division”) just lifted its “stay” on scoring 18 month old Medical Marijuanaapplications clearing the way for 5 cultivation, 15 dispensary, and 4 vertically integrated license awards.  In re Application for Medicinal Marijuana ATC for Tetra Grow, LLC (South), __ N.J. Super. __ (App. Div. 2021) (“Tetra Grow Opinion”).

When read in conjunction with its recent In re Application for Medicinal Marijuana ATC for Pangaea Health & Wellness, LLC, __ N.J. Super. __ (App. Div. 2020) (“Pangaea Opinion”) decision, Jersey provides nationwide guidance on application strategies, why “technical application challenges” will mostly fail, and how disgruntled applicants prevent medication from getting into the hands of sick people.

Further, based on its proximity to 44 million New York, Pennsylvania, Delaware, Maryland and Jersey “adult use access lacking” consumers, groundbreaking legislation (featuring statewide home delivery), and forward-thinking safeguards, New Jersey’s Adult Use Program will be first to market and set the standard for Mid-Atlantic Region Cannabis sales.

Jersey’s Medical MarijuanaProgram and Application Process

With a population of 8,882,190, in 2013, New Jersey launched a Medical Marijuana Program presently comprised of 100,000 patients/caregivers serviced by 12 vertically integrated grower-processor-dispensaries (“Alternative Treatment Centers” or “ATCs”) administered by the Department of Health (“DOH”).  Compassionate Use of Medical Marijuana Act, N.J.S.A. 24:6IEt Seq.(“Compassionate Use Act”).

Licenses were issued in a Request for Applications (“RFAs”) competitive process comprised of: Part A, a fillable Portable Document File (“PDF”) requiring status information (including each applicant and respective owners/operators, capitalization, and facility’s location/zoning); and Part B, detailed essays demonstrating grasp/compliance with Federal and state Cannabis, health, environmental and criminal laws, and how applicant is best suited to operate/scale to meet Jersey’s Medical Marijuana needs.

Part A is “Pass/Fail” and Part B is scored by an “application review committee” comprised of members of the DOH, Department of Agriculture, and Department of Treasury.

Six (6) ATC licenses were issued, respectively, in 2016 (“Phase I”) and 2018 (“Phase II”) and in August 2019, the Jake Honig Compassionate Use Medical Cannabis Act, N.J.S.A. 24:6I-2, Et Seq.was passed replacing the Compassionate Use Act, expanding the Medical Marijuana Program, and creating the Cannabis Regulatory Commission (“CRC”).

Following unsuccessful Phase II applicants’ “scoring anomalies” challenge, the Appellate Division found grading inconsistencies in Part B submissions, instructed the DOH to investigate and reform the scoring process, but refused to order any application reconsideration or issuing of additional licenses.  Pangaea Opinion.

Lifting Stay on Phase III License Issuance

In July 2019, the DOH issued an RFA for 24 Medical Marijuana licenses (5 cultivation, 15 dispensary and 4 vertically integrated) (“Phase III”) mirroring the prior “Part A Pass/Fail” and “Part B Scored Essay” format.  Following the 3:00 pm, August 21, 2019 submission deadline, 196 applications were received by the DOH and, based on prior rounds’ timetable, license issuance was anticipated within 90 days.

Following an inability to open Part A PDF submissions, the DOH disqualified multiple Phase III applications as incomplete and untimely. In December of 2019, several disqualified applicants challenged the rejections and received a stay from the Appellate Division barring the DOH from reviewing and scoring the over 150 “completed” applications.

After languishing for 14 months, the Appellate Division issued the Tetra Grow Opinion affirming the DOH’s application grading process and conclusions underscoring the DOH’s guidance that “[a]pplicants assume sole responsibility for the complete effort involved in the application submission”.

Rejecting arguments that Phase III applicants were entitled to a hearing-style process to vet the DOH’s methods for assessing technical problems, the Appellate Division ruled that “[t]he Administrative Procedure Act . . . does not create a substantive right to an administrative hearing”, the DOH “was merely determining whether appellants’ submitted the information required by Part A,” and, by submitting corrupted files, the filings were non-compliant.  Tetra Grow Opinion.

Further, distinguishing the Pangaea Opinion applicants, the Appellate Division held that the Phase II challenges regarded Part B scoring inconsistencies and not Part A “technical compliance”.  Id.

Pangaea and Tetra Grow Opinions’ National Impact

Both when read on its own, and in conjunction with the Pangaea Opinion, the Tetra Grow Opinion provides nationwide guidance on application strategies and legal challenges to application denial.

First, both rulings illustrate that comprehending not only the application’s instructions and relevant statutes/regulations plus every regulator-provided communication is critical. The Tetra Grow Opinion repeatedly highlights the importance of adhering to both the hard copy RFAs and all DOH sponsored Webinars and “Frequently Asked Questions” responses.  Each scrap of information may be a game-changer.

Second, the rulings underscore which administrative challenges are doomed and which may gain traction. Although subjective grading issues may create leverage for application reconsideration or scoring process overhaul, technical glitches or misunderstanding of the process will always disfavor challenging applicants.

Third, getting medicine into sick people’s hands isn’t every applicant’s top priority. After swearing to be the most adept at satisfying Jersey’s Medical Marijuana needs, the Tetra Grow applicants needlessly created a 14^th month delay in issuing 24 licenses to help ailing New Jersey residents.

Jersey’s Adult Use Program and Licensing Process

On February 22, 2020, Governor Phil Murphy signed adult-use Cannabis reform bills into law legalizing and regulating Cannabis use/possession for adults 21 years and older (“New Jersey Cannabis Regulatory, Enforcement Assistance, and Marketplace Modernization” Act (“Adult Use Act”)), decriminalizing Marijuana possession (“Act 1897”), and clarifying Cannabis use and possession penalties for those under 21 (“Act S344”).

Under the Adult Use Act, those 21 and older can purchase an ounce of Marijuana or 5 grams of concentrated Cannabis and, after Act’s rules are issued, existing Alternative Treatment Centers could immediately begin adult-use sales (but only if having sufficient quantities to meet medical Cannabis demand).

The Adult Use Act establishes 6 classes of licensed businesses: cultivator, manufacturer, wholesaler, distributor, retailer and delivery. Up to 37 Marijuana grow licenses may be issued for first 2 years of legal sales (but limit does not apply to microlicenses with 10 or fewer employees).

The Act imposes a 7% state sales tax, an excise tax on cultivators, and enables municipalities to impose up to 2% hosting tax. Seventy percent (70%) of sales and excise tax revenue will support legal aid, health care and mentoring programs in minority communities disproportionately affected by the drug war.

Retail stores are allowed statewide (although local jurisdictions could ban them) delivery services may operate statewide regardless of local bans, and, as long as they have local approval, retailers may offer on-site consumption.

Under the Adult Use Act, the CRC oversees Cannabis business licensing applications and, as determined by “customer demand”, will grant licenses to growers, processors, wholesalers, laboratory testing facilities, distributors, delivery services and retailers. Twenty five percent (25%) of licenses would go to microbusinesses capped at 10 employees and include additional residency requirements, 15% of licenses are reserved for minority-owned businesses, and 15% of licenses are reserved for businesses owned by women or veterans. To make process more accessible to lower-income applicants, 35% of licenses in each license category would be “conditional”.

The CRC’s “application scoring priorities” include:

* 25% of licenses be awarded to applicants employing 25% of individuals from “impact zones” negatively impacted by unemployment, poverty or past Marijuana enforcement activity;

* residents of at least 5 years holding at least a 5% investment interest in an entity; and

* requiring Labor Peace Agreements (except for microbusinesses).

The Adult Use Act provides for Cannabis revenues reinvestment in designated “impact zones”, directs the CRC to promote diversity and inclusion in business ownership, and employment protections for those engaging in lawful behavior with respect to Cannabis.

Act 1897 reforms criminal and civil penalties for Marijuana offenses and provides remedies for people currently facing Marijuana charges. The bill prevents unlawful low-level distribution and possession offenses from being used in pretrial release, probation, and parole decisions and provides protections against discrimination in employment, housing, and places of public accommodation. Act 1897 also creates a pathway to vacate active sentences for offenses committed before the enabling legislation’s enactment.

Correcting prior laws inconsistencies regarding Cannabis penalties for those underage, Act 3454 clarifies Marijuana possession and consumption penalties for those under 21.

Reprinted with permission from the 3/19/21 edition of Law.com © 2021 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or [email protected].