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On August 2, a lawsuit by four service impaired veterans was filed in New York Supreme Court in Albany County against the state’s cannabis regulators that has brought the ongoing CAURD program to a screeching halt following an August 7 order issued by Justice Kevin R. Bryant that prohibits the Cannabis Control Board from “awarding or further processing any more CAURD licenses and/or conferring operational approval upon any more provisional or existing CAURD licenses pending further order of this court.”
Three days earlier, New York Assistant Attorney General Shannan C Krasnokutski had sent a letter to Justice Bryant arguing against the plaintiff’s request for temporary relief. “Provisionally approved CAURD licensees are incurring financial obligations each day in the hundreds of thousands of dollars on construction crews renovating their stores, various vendors installing point of sale systems and other items required to meet the regulatory specifications, suppliers preparing orders to ship product to the provisional licensees, meetings with compliance teams and local communities, and press schedules, among others,” she wrote. “Asking for a stop to all this activity is not asking for the status quo to be maintained, but rather is asking for affirmative mandatory action that will harm current licensees, and which should be issued only in extraordinary circumstances, which Plaintiffs have not established here.”
Instead, Justice Bryant ordered a cessation of the CAURD program until the issue can be adjudicated by the court, and scheduled oral arguments for this Friday, August 11, at 10am ET, at the Albany County Court House in Albany, New York. Immediate reaction to the order was a general sense of shock that an adult-use program that has already undergone so many setbacks could now be stopped in its tracks by plaintiffs arguing that the entire CAURD program was created by the Office of Cannabis Management and the Cannabis Control Board in violation of the letter of the law and the dormant commerce clause of the United States Constitution. The implication for knowledgeable observers was that the outcome of the case could threaten the entire program and possibly even the awarded conditional licenses of CAURD applicants.
“I’ve been speaking with clients since the potential of the order being entered was brought to my attention,” said Robert DiPisa during a call Wednesday with Cannabis Business Executive. A member of the Real Estate Department at Cole Schotz and chair of the firm’s Cannabis Law Group, DiPisa continued, “At the time, I told people, ‘Let’s see how it goes,’ but Tuesday the order was entered, and now we’re in this holding pattern until Friday. The hope is that we get some additional information and clarity on Friday, but chances are the judge isn’t going to have that much time to make a determination on whether the stay should stay in place or be lifted, and what would most likely happen in that situation is the judge would keep the stay in place until they have had an opportunity to truly hear arguments and analyze what should happen here.”
I asked if he had had a chance to evaluate the complaint. “This is just my off-the-cuff analysis,” he replied, “but it is clear in the MRTA (The Marihuana Regulation & Taxation Act) that when it comes to the implementation of the social equity plan, what was supposed to happen was twofold. We were supposed to promote and prioritize those communities that have been disproportionately impacted, and promote and prioritize certain racial, ethnic, and gender diverse groups; specifically, obviously, minority- or women-owned businesses, distressed farmers, and service-disabled veterans, and I think the problem lies here.
“I can understand why the OCM wanted to target specific individuals or their families who have been impacted by the war on drugs,” he added, “and why they’ve taken a laser-focused approach in the CAURD program for individuals who have been charged and or convicted of cannabis related offense in the state of New York prior to March of 2021. But what ended up happening is that by taking that approach and only accepting applications from those individuals, they ended up excluding an entirely different class of individuals who are also supposed to be prioritized and promoted. The problem is the guidance. What they were supposed to do is promote particular groups, and what they ended up doing was excluding everyone other than those justice involved individuals, and that’s where the deviation lies as to what they were supposed to do pursuant to the MRTA.”
DiPisa emphasized that the program did not have to be undertaken in precisely that way. “They had an obligation to accept all the applications at the same time,” he said, “so what they could have done is open up the application process to everyone at the same time, and then prioritize the justice involved individuals and those individuals who are minority, women-owned, distressed farmers, and service-disabled veteran, by giving them priority review – those applications will get reviewed first, and licenses will be distributed to them first – or providing a certain amount of points that are allocated to those individuals in the scoring methodology to help promote and prioritize them. Obviously, that wasn’t done here, but you could see how that could essentially create the same effect, because if you’re prioritizing those applicants, and reviewing and issuing licenses to them first, you have done what the MRTA has asked. The problem is they excluded this entirely different class of individuals that they were supposed to promote.”
In addition to supporting the claims of the plaintiffs, however, the complaint also argues that the CAURD program is unconstitutional by its very existence. “The argument is that [the regulators] created an entirely new class of licenses, and they didn’t have authority to do that pursuant to the separation of powers, and that the legislature was the one that would have the power to implement that new license class,” explained DiPisa.
Could the regulators argue that their execution of the program was consistent with the intent of the legislature? “I understand the argument that they had an obligation to create the social equity program, and this is the way they implemented it,” he said, “but their instructions were to promote and prioritize the communities that are disproportionately impacted and those minority-owned, disabled veteran-owned, women-owned businesses, and they didn’t promote the minority, women owned, service-disabled veterans in the CAURD program.”
I asked DiPisa what he thinks are the most compelling arguments presented in the complaint. “First and foremost is that they were supposed to open the retail dispensary license application period to all applicants at the same time,” he said. “That’s the language straight from it, and it’s very clear that they had that obligation. But they didn’t open it to all dispensary license applicants at the same time. They only opened licenses for retail dispensaries to these CAURD-licensed qualifying applicants. When the program first started, it was 150 licenses, and since then it has ballooned to over 450. And you have to ask yourself, did the continuing expansion of this program cause it to be magnified to where individuals are going to pay a lot closer attention? This wasn’t just a quick initial 150, but it continuously expanded and grew and grew to the point where it’s almost hard to not look into it further, because that continuous expansion led to a further delay of the application process opening up to those non-CAURD qualifying applicants.”
What about any compelling counter-arguments? “Service-disabled veterans weren’t specifically excluded,” he responded. “Technically, a service-disabled veteran could have partnered with a justice involved individual, because the ownership structure didn’t require the justice-involved individuals to own 100 percent of the applicant entity. So, there was a pathway for the service-disabled veterans to apply if they partnered with a CAURD-licensed qualifying applicant. At the end of the day, though, I think the problem is that they failed to also promote and prioritize the service-disabled veterans. They didn’t open the application process to an individual who is only a service-disabled veteran, so I think it’s going to be challenging for the OCM to fight this one. I think an expedited resolution to this litigation is what’s going to be best for everyone, because at the end of the day, what’s going to happen is these justice-involved individuals who have already been disproportionately impacted by the War on Drugs are only going to experience more loss if the program is delayed.”
If the CAURD program does violate the law as well as the Constitution, is the entire program at risk? “It’s a very good question,” said DiPisa. “My concern is this. While the stay of proceeding applies to those who have not received licenses or who have received the provisional license but have not yet been approved for operations, if the entire CAURD program is deemed to violate the separation of powers doctrine, what does that mean for those who have the licenses and are already operating? Would those licenses potentially be deemed revoked, and would we have to shut down those existing operations? Are people going to lose their jobs? Are we have an even greater supply chain issue than we already are experiencing, because now cultivators and manufacturers will have nowhere to sell their regulated products?
“So, my concern is if the entire program is deemed to be in violation of the separation of powers doctrine, what does that mean for the CAURD license holders who are operational, and does it mean that their licenses are essentially void, and they would have to shut down their existing operations,” he reiterated. “It’s just a question, but it’s something that should be considered as a potential result of more delay.”
Why is the court responsible for figuring out how to resolve the rollout of adult use cannabis if it is the state legislature that created the OCM and CCB? “I don’t view it as the judge being responsible to fix the issue,” said DiPisa. “The judge is supposed to hear the arguments, interpret the law, and make a determination as to whether the CAURD program that was implemented by the OCM violates the MRTA. I don’t think they necessarily are the ones who have to come in and fix the problem.
“The thing is,” he added, “I don’t know if this is a problem that can really be fixed and let me just clarify that. The whole point of the social equity program was to give those communities that were disproportionately impacted and those who qualify as minority, women-owned, distressed farmers, and service-disabled veterans, a leg up, and to prioritize them, give them the first crack at the market. But at this point, licenses have already been given out in the CAURD program, individuals have commenced operations, and we can’t rewind time. It’s going to be very challenging to make these individuals whole. So, I’m still trying to figure out what would be a just remedy to fix the problem, and I don’t think that it’s forcing CAURD-licensed operators to shut down and redo the whole process over again. I just don’t know if that’s the best thing for the industry and the New York market.”
In Limbo
“We’re at this point right now where we’re in limbo, and while there may be potential losses on the horizon for CAURD applicants and operators, we have to wait and see what happens on Friday,” said DiPisa of the upcoming hearing. “I think that no matter how you look at it, two things will harm the CAURD licensees and operators – if the stay of proceeding is kept in place for a significant amount of time or until the matter is fully adjudicated, or an adverse ruling that the entire program violates the separation of powers and is a violation MRTA. Both of those scenarios are going to be harmful to CAURD licensees.
“Even just the stay of proceeding staying in place until the matter is fully adjudicated is going to put the CAURD licensees in a difficult position,” he added, “because they’re at the point where they have leased property, they may be in the middle of a build out, or they may be completely built out and waiting for approval to open and operate. Now, more likely than not, they need to pay the carrying costs of their real estate, and they’ve incurred x-amount of expenses for build out.”
The situation for CAURD licensees is further complicated by the design of the program itself, he noted. “Don’t forget that when the fund was created, those dollars were going to benefit the first 150 CAURD licensees,” said DiPisa. “For everyone after that, it was, ‘If there’s anything left over in the fund, maybe you can have a crack at it.’ But once we ran into issues with DASNY leasing real estate, and the OCM came out and said, ‘Okay, CAURD licensees, you can lease your own property and build out your own space to help jumpstart and expedite the process,’ that’s when these CAURD licensees started laying out their own cash, and that is what has set them up for potential losses in the event that the stay of proceeding is continued or there’s a ruling that the entire program violates separation of powers and MRTA.”
Is the harm exponential so it gets worse by the day? “It certainly will be based on the length of time that the stay of proceedings is in place,” said DiPisa. “I don’t know what’s in these CAURD licensee lease agreements, or if they have contingencies baked in, but chances are if they’re already operating, or are at the point where the build-out is complete, they are locked into these leases and they’ll be incurring monthly costs for rent, with no income coming in.”
What about obligations made for projects just getting underway or investors that might get cold feet or start freezing or clawing back money? “Oh, that’s certainly possible,” responded DiPisa. “Investment in the cannabis industry has significantly dried up, so it’s hard to find investors, and even harder to get construction financing for these types of operations. A lot of the banks that provide construction financing and things like that for the cannabis industry are usually smaller regional banks, and if you’re paying attention to what’s happening in Silicon Valley, these regional banks have really tightened up.
“With the stay in place, how likely are lenders going to be to provide construction financing to current licensees knowing that they may not get open,” he continued. “It can have a chilling effect on the entire market, and especially the supply chain. As of now, 20 licensees plus or minus are operational, and if for whatever reason the program is invalidated and the CAURD license is made invalid, where does regulated cannabis get sold?”
The Beneficiaries
As far as who would benefit if the stay were continued or the program upended, “We’re left with the legacy operators that are open in New York City and they have storefronts everywhere,” said DiPisa. Registered Organizations – the vertical medical operators most of whom are large MSOs – are not impacted by the order either. “This only applies to the CAURD license program. The medical license operators are not going to be impacted.”
The picture gets even more complex for CAURD licensees on the cusp of leasing property or entering into any sort of financial commitment. “After the order, I think they’re going to be a little more reluctant to make any kind of financial commitments based upon whatever happens on Friday,” noted DiPisa. “But it’s tricky, because CAURD licensees are also on a timetable to do certain things, like get final approval on their provisional [license], so to some extent they need to keep moving forward. Technically, if they don’t, the OCM can revoke their provisional and offer it to someone else, so it’s going to be very challenging to navigate this over the course of the next month or so depending on how things go on Friday.
“At the end of the day, we’re building a plane and flying it at the same time,” he added. “The regulations are organic at this point, and the key to making them better is to identify issues and tweak and correct them, mostly at the regulatory level. It’s harder to do at the legislative level, so the best thing is when the legislature gives wiggle room to the regulatory body to amend and implement changes to regulations much quicker than what the legislature could do. I think that challenges are to be expected, but when it comes to something like this, where an entire program deviates from what the MRTA calls for, that’s when we find ourselves in situations that could wind up creating a more stagnant program in New York.”
Does the fact that no one in the executive branch or the legislature seems willing to address the merits or implications of the lawsuit mean that they tacitly don’t want to intervene and actually support the CAURD program? “I don’t know what their silence could mean,” said DiPisa. “I do know that a lot of these programs are implemented for a number of reasons, but at the end of the day everyone knows that there are tax dollars behind it, and when these programs are delayed, when the rollout is slow, all it means is less tax dollars for the state and the communities.
And there is a ripple effect,” he added. “When a retail dispensary or cultivation facility opens up in a municipality, it creates jobs, it creates revenue, increased foot traffic, that feeds the neighboring businesses. I’ve seen it at shopping centers, especially in my regulatory work and in my real estate work. I’ve seen these uses go into centers and all of a sudden, you have all this foot traffic that is feeding business to the neighboring tenancies. When you slow this down, it pulls those dollars out of those communities, the tax dollars don’t come, the revenue to the neighboring communities doesn’t come. It’s unfortunate to see this, and I think what’s going to be best for everyone is that whatever the resolution is, we find an amicable resolution and make sure that it’s done very quickly.”
Considering the possible repercussions, could the outcome on Friday result in panic? “Even no news on Friday would not be good,” replied DiPisa. “What I mean by no news is if the order stays in place because the court hasn’t had enough time to make a determination on it. Just the fact of the order staying in place will result in losses to current license holders, and license holders who are about to make any kind of financial commitment thinking twice. I just don’t see any other way.”
In light of that scenario, should the OCM at least proffer a compromise of some sort that avoids that scenario? “Some kind of settlement,” agreed DiPisa, “because the length of the time to go the distance on the litigation with the order in place will have the effect of chilling the market and result in CAURD licensees incurring losses.”
Did he have an idea of what such a compromise would look like? “It’s hard because if someone files a lawsuit and your response is to award them a license or something, you also at the same time don’t want to set a precedent there,” he said. “And by the way, I’m not challenging the merits. I do think that the MRTA says one thing and the CAURD program does something else, but at the same time, you don’t necessarily want to reward every individual who files a lawsuit.”
It sounded to me like a situation where the state could potentially be looking at over 400 lawsuits instead of the two it now faces. “They certainly could,” agreed DiPisa. “Depending on how long the order stays in place, there could be a significant number of licensees who incur losses because of it. So, I really hope that there’s a speedy and amicable resolution.”
I proposed that the legislature, which arguably caused all of this, could or should be the source of a solution. “If you’re asking if the legislature could amend the MRTA to permit what the OCM has done, do you know how long that would take,” responded DiPisa. “I don’t think we can look to them as our savior to resolve the situation in the near term.”
While it’s hard not to be pessimistic about Friday’s prospects for a resolution that prevents many people from incurring unsustainable losses, DiPisa is leaving room for a positive outcome. “I am a lawyer, so by nature I’m a glass-half-empty type of individual and anticipate the problems and the rainy days on the horizon, and try to plan for it,” he said, “but I am hopeful that there will be some kind of resolution.”
I asked him if there was any sort of consensus among the New York cannabis legal community about the case. “I was at an event last night, and obviously the lawyers all find each other, and we’re all talking about it,” he said. “And I guess, just based on the conversations, that people do seem to agree that the MRTA says one thing and the CAURD program does something else. But at the same time, we live this stuff with our clients, all the successes and failures, and so we have a vested interest in seeing a speedy resolution for the benefit of all the groups that we advise on this kind of stuff, and it will age you.”
Does that mean he will be in court on Friday for the hearing? “I’ll be there,” he promised. “If something comes up, I’ll send someone else from my office, but I’m planning on being there.”
The State Responds
After speaking with DiPisa, the state filed a Memorandum of Law in Opposition with the court at 5:02pm that offers a full-court defense of the CAURD program, arguing that the plaintiffs are not entitled to preliminary injunctive release.
“Plaintiffs fail to show that any irreparable harm would result from the continuation of the CAURD licensing program, as all of Plaintiffs’ allegations of harm are based solely on economic loss or are entirely speculative,” reads the preliminary statement. “Plaintiffs also cannot show a clear or substantial likelihood of success on the merits of this action because the Conditional Adult- Use Retail Dispensary (‘CAURD’) licensing program, challenged by Plaintiffs, is consistent with both the Marijuana Regulation and Taxation Act (‘MRTA’) and the separation of powers doctrine. Further, the equitable doctrine of laches bars this action.
“Finally,” it continues, “the equities and public interest balance heavily in favor of Defendants, since the State, potential licensees, farmers, and the public would suffer substantial harm from the disruption of an entire industry in which numerous stakeholders have made significant investments. Conversely, because Defendants anticipate opening applications for general adult-use licenses within approximately sixty days, Plaintiffs would not be prejudiced if required to apply for licenses in the ordinary course.”
The Memorandum in Opposition can be read here.
The complaint can be read here.
The Order can be read here.
A list of all documents filed in the case can be found here.
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