Lawsuits likely when state picks pot sites: ‘Losers don’t like losing’

3:37 p.m Wednesday, Oct. 18, 2017 News

As Ohio officials get set to grant two dozen companies lucrative licenses to grow medical marijuana in the state, they may want to give a heads up to their legal team.

The selections, due in the coming weeks, will be culled from an original list of 185 applicants, meaning 161 of those applicants — who together spent millions of dollars vying for the opportunity — will leave empty-handed.

And in other states, that has caused more than just hard feelings.

In Pennsylvania, a company passed over for a growing license sued that state last month alleging its process wasn’t transparent or fair. The company is asking the court to make the state start the licensing process all over.

Maryland is facing a lawsuit brought by a company that didn’t get a growing license and alleges the state improperly took the location of proposed facilities into account.

Legal issues have stymied the roll out of medical marijuana in FloridaNevadaMassachusetts and elsewhere.

“This happens in every state,” said Alan Brochstein, a cannabis industry financial expert. “The losers don’t like losing, and they’ve already invested a lot of time and money so they’ll take extraordinary efforts to keep the dream alive.”

Brett Roper, a medical marijuana licensing consultant, said these companies spend between hundreds of thousands and millions of dollars in hopes of securing a spot in what could potentially be a $100 million a year industry.

Roper, who has worked with some of the Ohio applicants, said the state appears to be trying to learn from problems that have occurred elsewhere.

“I think at the end of the day if Ohio does a good job of vetting the applications and scoring them consistently, I don’t think anyone has a real ax to grind,” he said. “There was nothing in (the application process) that would lead me to think this is going to open them up big time for a lawsuit.”

But, said Roper, most of the challenges in other states came from how applications were scored, and that process has yet to be seen in Ohio.

The Ohio Department of Commerce is tasked under law with licensing growers, while other aspects of Ohio’s medical marijuana program are regulated by the Ohio Pharmacy Board and the Ohio Medical Board.

“(These agencies have) undertaken a legislative blueprint of this program and have fulfilled every statutory requirement to date,” said commerce department spokeswoman Stephanie Gostomski in an email response to questions about efforts made to ensure the process is fair.

“Commerce has done its due diligence in research and worked collaboratively with stakeholders every step of the way to meet the legislative guidelines and deadlines,” she said.

After cultivators, the state still needs to license processors, testing labs and dispensaries and have the program fully operational by September 2018.

“If Ohio is able to hit that September 2018 deadline…it will be one of the best, if not the best, implementations of medical marijuana in terms of hitting those timelines,” Brochstein said.

The Ohio Controlling Board in June gave the commerce department approval to pay three consulting firms up to $150,000 each to score the applications. They are the Arizona-based Meade & Wing, LLC; Illinois-based B&B Grow Solutions; and iCann, based in Dublin, Ohio.

To eliminate bias in the scoring, any reference identifying the applicant is removed and replaced by aliases. Applicants can lose points for including information that identifies them.

“The scoring system was one of many aspects of this program where commerce utilized information gained from states that have previously on-boarded similar medical marijuana programs,” Gostomski said. “It’s imperative to the program that the final score reflects the quality of the application, not who is applying.”

Ohio rules prohibit any one person from having any ownership in more than one facility. Several people filed multiple applications at more than one location, but can only get a license for one of them. Even investors can only have an interest in one facility.

The consultants will score the applications with a process giving particular weight to experience and standard operating procedures, as well as quality assurance and security.

Roper said the problem that emerged in Pennsylvania was the scoring seemed arbitrary: a company would submit two applications with different locations and identical sections of the application would get wildly different scores.

“If Ohio were to have some sort of scoring rubric where they had six different people scoring the questions, then I don’t think that’s fair to the applicant,” he said. “If Ohio has the same scoring process for all of the similar applications… then I think they avoid that potential risk.”

One factor that won’t be taken into consideration is location.

An I-Team analysis of applications shows they are concentrated in the Cleveland-Columbus-Cincinnati corridor. With seven applications, Dayton has the fourth most in the state, topped by Columbus, Akron and Toledo.

Monroe has four proposed facilities. In Clark County there was only one, in Mad River Twp.

Several areas of have clusters of applications. The village of Johnstown, northeast of Columbus, has five applicants. Most surround the Johnstown company Apeks Supercritical, a leading manufacturer of cannabis oil extraction equipment.

Nothing prevents the state from licensing facilities clustered in one part of the state.

“The location of the proposed facility was not part of the scoring review process,” Gostomski said.

All of the applicants had to submit a form saying that at the time they applied there was no legal restriction to using the land for medical marijuana. But the review process doesn’t look to see if that later changed.

Huber Heights, for example, is home to two proposed growing sites. But the city council voted down a zoning change to allow medical marijuana in the city. The city polled residents in August and found half of respondents supported allowing it, and half opposed it.

Gostomski didn’t respond to a question asking how this would be addressed. But the question did come up in a previous question and answer session on the department’s website.

“Will successful applicants be permitted to change locations if the local municipality passes a moratorium either after the application has been submitted or the provisional license has been granted?” one applicant asked.

“The Department will address this issue if it arises,” was the response.

Another potential legal hurdle is a portion of the law requiring no less than 15 percent of the cultivator, processor or laboratory licenses go to Ohioans in “one of the following economically disadvantaged groups: Blacks or African Americans. American Indians. Hispanics or Latinos, and Asians.”

The math alone could be a problem, because 15 percent of 24 is 3.6.

If four of the 24 highest scoring applicants qualify as economically disadvantaged companies, then this won’t be a problem, Roper said. But if the state rounds the number down to three or up to four, those left out could decide to sue, he said.

When asked about this, state officials said only that they will follow the law.

Several of the applications list the names of prominent minority business owners. Locally this includes Stephen Hightower, founder of Middletown-based Hightower Petroleum, who is listed as owner of a company seeking a growing permit in Cincinnati. Hightower did not return a call for comment about the state’s process.

Of the 185 applications, 109 are for Level 1 licenses, allowing for an initial growing area of up to 25,000-square-feet. The other 76 are for Level 2 licenses allowing for growing up to 3,000-square-feet at first. All grow sites must be indoors.

The potential payoff for companies that get in on the ground floor can be seen in the amount of money that was spent to get this far.

Level 1 applications carried a $20,000 application fee; level 2 licenses cost $2,000 to apply. The fees are non-refundable, meaning $2.3 million was spent just on the applications.

The state’s medical marijuana program has a $5 million budget and is designed to be self-funded with fees. Its budget includes money for administrative hearings requested by applicants who didn’t receive a license and want to object to the agency’s selections.

A spokeswoman for Pennsylvania’s health department said it has handled 141 appeals from growers, processors and distributors — in addition to the lawsuit trying to halt entire program.

Brochstein, who founded the news aggregation site New Cannabis Ventures, said companies have a lot at stake, but not as much as the patients desperately waiting on medical marijuana to ease their pain and suffering.

Companies that sue and delay programs need to take that into account, he said.

“They forget that this is about medical cannabis patients and helping patients, and these delays can literally mean the difference between life and death, and forcing people to break laws,” he said.

“Hopefully that doesn’t happen in Ohio.”

View full experience