Minnesota Governor Indicates Support For Adjusting State’s Cannabis Law To Avoid Lawsuits Over Licensing

“I think you need to get it right but I think timeliness is critical.”

By Peter Callaghan, MinnPost

Minnesota state cannabis regulators think a key to getting the state’s program up and running by next spring is a lottery.

Not THE lottery, as in the Minnesota state lottery. But a similarly random method for deciding which applicants receive the first licenses to open stores, build large grow operations or create the combination enterprises known as cannabis microbusinesses and cannabis mezzobusinesses.

While the method in current law—deciding which applicants win licenses based on how many points they accumulate—might be just as fast, it is also more likely to attract lawsuits that will slow the process, regulators say. Litigation in other states, often over the preference given to what are defined as social equity applicants, has delayed the opening of stores and other cannabis businesses.

So a lottery, as well as other changes in the 2023 recreational marijuana law, can be seen as a lawsuit repellant.

“What we have seen, particularly when it comes to how you determine social equity status, is that a point system has been subject to legal challenge,” said interim Office of Cannabis Management director Charlene Briner in an interview this week. “We’re certainly not creating these proposals based solely on the lens of mitigating legal risk. But it is certainly a factor that we consider, because one of the biggest challenges in other states has been the constant parade of legal challenges.”

Gov. Tim Walz (D) said Wednesday that it makes sense to foresee the chances for litigation and respond in the bill.

“I think you need to get it right but I think timeliness is critical,” Walz said. “My goal is to still meet the timelines.” Current law envisions non-tribal retail sales to begin in March of 2025.

The 2023 law created a complex points system under which applicants would get bonuses for meeting a list of goals, from being a veteran to having financial plans and employee training systems in place. At least 20 percent of the points available would go to what are defined as social equity applicants. Those are meant to help people and communities who suffered under marijuana prohibition benefit financially from legalization.

But points systems in other states have been accused of being arbitrary and discriminatory, because they cannot be put in place without some subjectivity on the part of the state agencies that award points. A 2022 suit against New York’s social equity licensing plan delayed that state’s rollout and contributed to widespread illegal sales. Similar suits have led to a reappraisal in how social equity considerations are used. (MJBiz reported that the same couple from California has been involved in many of the legal challenges.)

In an essay assessing the first decade of state legalization, a consulting firm that works for the Minnesota Office of Medical Cannabis noted that “nowhere has the tension between good intentions and impossible implementation been felt more acutely than the social equity licensing programs.” The article, by Mackenzie Slade, executive director of the Cannabis Public Policy Consulting, drew two conclusions on how to avoid “a failed program”:

• Point systems should never be used to determine who gets licenses.
• Social equity applicants should be allowed to raise money from non-social equity investors.

OCM is proposing to change Minnesota’s law to allow social equity applicants to raise more money from non-social equity investors (more on that below). But the abandonment of the points systems is at the heart of the legislation requested last week by Briner.

“The legislation that passed last year does contain provisions that when you look across what has happened in other states is a lightning rod for litigation, especially the type of litigation that can hold up licensure altogether,” said Leili Fatehi, a lobbyist for cannabis businesses and organizations who worked on the bill last year.

A foundational pillar of House File 100 was that people and communities that suffered the most from enforcement of the prohibition on marijuana should be given a chance to profit from its legalization. Setting aside a share of the licenses was considered the best way, though the law also provides grants to applicants and communities that historically had a higher proportion of arrests and prosecutions.

Briner said in an interview this week that the state should alter its provisions that give social equity applicants a boost while also reducing the odds of successful legal challenges.

Here is how the OCM bill would do that:

• Creating a temporary license system. Social equity applicants—either individuals or business groups with social equity participation—could apply for early temporary licenses as soon as this summer. If they meet the criteria and display financial and management preparation, and if there are more applicants than the number of licenses available, they would be entered into a lottery.
• Allowing temp licenses holders to move toward opening. The winners of what Briner terms “a golden ticket,” could then move toward securing business sites and applying for local permission. If they remain in good standing with OCM, these applicants would be guaranteed full licenses when rules and regulations are finished and the legal program rolls out next spring.
• Creating a second-chance lottery. Social equity applicants who did not get into the first lottery would have a chance for a second lottery, likely early next year.
• Creating a third lottery. All other applicants, including social equity applicants who weren’t lottery winners, would be entered in a third lottery sometime in the first three months of 2025.

This “early mover advantage” does allow these social equity licensees to get everything ready to start business. It does not let them grow or sell cannabis before other licensees and does not allow them to get going until rules are finished sometime in the first three months of 2025.

“People won’t actually touch the plant,” Briner said. “They won’t be putting seeds in the ground or cultivating a plant or opening the doors of a dispensary.” But they are getting their buildings secure, their financing lined up, their local approvals in place all with the knowledge that they are guaranteed a license. Non-social equity applicants won’t have that assurance until later in the process.

Fatehi said the point of the early license is to help assure lenders and landlords that a cannabis businessperson is worth the risk.

“If you’re a white person who has owned businesses before, a landlord or a bank are much more willing to assume you are likely to be granted a license and they let you in the door,” she said. “But if you are Black or someone who has a criminal record, they just assume you are not well positioned to receive a license.”

The temporary license provides “the imprimatur” of the state. “It is comfort language for that external stakeholder group, and that group is landlords and investors,” Fatehi said.

Rep. Zack Stephenson (DFL-Coon Rapids) was the prime sponsor of House File 100 last session and is sponsoring the OCM request bill as a courtesy to the agency. While there are aspects he supports, he isn’t ready to endorse the entire proposal. Inoculating the law against legal challenges is always wise, he said. But he wants to make sure that it doesn’t undermine the building blocks of the law, especially social equity and making sure the industry is Minnesota-based.

“You want it to be as resilient against legal assaults as possible, but we have to serve the goals of the legislation,” he said. “We’re not going to undermine our attempt to create a Minnesota marketplace with good consumer protections and [that] prioritizes people who were harmed by prohibition.

“We’re not going to undermine those goals because we’re afraid of a lawsuit,” he said. “We want licenses issued as soon as possible and litigation will slow it down. Whether what OCM has put out will mitigate that risk is something we still need to talk about.”

Having two different lotteries, as OCM proposes—one for social equity applicants and another for all applicants—could assure that some licenses can be issued and some businesses started even if there are legal challenges to the social equity provisions.

As for Minnesota’s existing hemp-derived THC edibles industry, businesses that want to continue hemp-only sales will be able to convert their current registrations to low-potency hemp licenses next spring. If a hemp business wanted to transition into marijuana sales, it would have to follow the same process as other applicants.

Relaxing restrictions for raising capital

The OCM bill would also change current law in another way. It would require social equity applicants to come up with only 65 percent of the money needed to start the business—down from 100 percent now. The 100 percent requirement was meant to assure that predatory investors couldn’t offer money to social-equity eligible applicants and then take control of the business later. That has happened in other states.

But as the state’s consultant Slade wrote, that can also prevent applicants from having the money needed in the first place. Federal prohibition of cannabis makes borrowing from traditional banks difficult, and social equity applicants are less likely to have personal or family wealth.

Current law also says that holders of social equity licenses can only sell their businesses to others who also meet the social equity requirements. The OCM proposal would allow sales to any purchaser after three years.

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Another provision in the OCM bill likely presented with an eye toward possible legal challenges is how it defines the type of farmer who is eligible for social equity status for cannabis cultivator licenses. The current law refers to the definition of “emerging farmer” used by the state Department of Agriculture for a program to help some people buy farms. That language is currently being challenged in court.

The proposal from OCM changes the definition to someone who is “currently a farmer or an aspiring cannabis farmer who faces barriers to education​ or employment.” A bill filed by Rep. Samantha Vang (DFL-Brooklyn Center) would change the definition for all state assistance programs from emerging farmer to “limited resources farmer.”

Carol Moss, a Minneapolis attorney with a specialty in cannabis law, said that change is a good idea.

“That definition was so overly broad to the point it was not workable. Just about every applicant could find a way to pigeonhole themselves in as an ‘emerging farmer,’” she said. “Plus, I have doubts it could pass constitutional challenges that we know will be inevitable.”

Clarity over number of licenses

The OCM proposal would make another significant change that could have legal implications. Current law empowers the agency to decide how many licenses to issue based on market demand. The OCM bill instead aims to clarify the process by having the Legislature put actual numbers for each category in law.

For example, the proposal says the office can issue 50 temporary licenses to social equity retailer applicants and 100 total licenses to social equity retailers. While Briner said the numbers are up for discussion with the Legislature, she thinks it is better for the Legislature to decide how many. If more are needed later, the OCM would analyze the market and make adjustments.

Briner said having the Legislature say how many licenses should be issued is needed because OCM doesn’t yet have a market analysis to know how many of various kinds of licenses are needed.

“The goal is to have some guidance for the first couple of years because we don’t have market data that will give OCM good information about whether we should issue more licenses or cool it down because we’re on the verge of oversaturation,” Briner said.

Fatehi called the OCM bill a starting point and said she expects, as with last year’s legalization bill, that it will be perfected as different players on the issue weigh in.

“We’re doing something different in Minnesota. There’s no shortcut for getting the policy right,” she said. “We’re gonna have the opportunity to open the hood on this and see how the parts fit together.”

This story was first published by MinnPost.

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Photo courtesy of Philip Steffan.