History was made last week as Virginia became the 16th US State and the first southern state to fully legalize adult use recreational cannabis. A victory no doubt for personal liberties as consumers will be permitted to possess up to one ounce, and four plants for personal consumption starting July 1. But now the real work begins as Virginia puts together the regulatory regime to govern commercial sales. Virginia can learn lessons from other states where the roll out of recreational cannabis struggled and seize on opportunities to create a fair and transparent model for other states to follow. We review below how some other states have handled their cannabis market roll outs. Our attention will be on transparency and fairness within the licensing process. In particular we will look at social equity licensing failures and the resulting licensing related lawsuits. Learning from others should be a first step in creating the Virginia cannabis market.
Access to License
The gatekeepers for each state’s cannabis market have the lofty goals of establishing a licensing process that is on the one hand equitable and on the other hand understandable and transparent. Where some states have gotten it wrong lawsuits have followed. In Nevada for instance, cannabis dispensary businesses sued the state in 2018 over what they claimed were “irregularities in its licensing process.” Specifically, one lawsuit described the process as lacking transparency and being “ripe for corruption” after a majority of the licenses were granted to relatively few applicants and many businesses complained that they were unfairly denied a license. Those lawsuits were largely settled in 2020, but a new bill introduced in 2021 is still seeking to untangle the mess by completely overhauling the licensing process and allowing current medical cannabis license holders to convert to recreational sales. Some complain that the new bill also consolidates licenses in the hands of the few which only stalls the development of a more competitive market.
Lawsuits seem to be a common trend in the emerging cannabis markets, but increased attention on Social Equity in more recent legalization states has the potential for its own mix of legal complexity.
Social Equity Licenses
In Virginia’s new law “social equity” takes a high priority including the establishment of a Cannabis Equity Reinvestment Board “to directly address the impact of economic disinvestment, violence, and historical overuse of criminal justice responses to community and individual needs by providing resources to support local design and control of community-based responses to such impacts.” The language is clear and the message is even more so; Virginia aims to create an inclusive cannabis market by focussing on outreach to communities where the war on drugs had a disproportionately worse effect. Some of the anticipated social equity initiatives include requiring people who wish to posses more than one license to create and submit “diversity, equity, and inclusion plans” which may include a requirement to participate in a “social equity apprenticeship program.” The most important initiative comes in the licensing process itself.
The Board is charged with establishing “criteria by which to evaluate social equity license applicants.” To qualify for this license an applicant must have lived or been domiciled for at least 12 months in the Commonwealth and is either:
(i) an applicant with at least 66 percent ownership by a person or persons who have been convicted of or adjudicated delinquent for any misdemeanor violation of certain marijuana specific laws;
(ii) an applicant with at least 66 percent ownership by a person or persons who is the parent, child, sibling, or spouse of a person who has been convicted of or adjudicated delinquent for any misdemeanor violation of those laws relating marijuana;
(iii) an applicant with at least 66 percent ownership by a person or persons who have resided for at least three of the past five years in a jurisdiction that is determined to have been disproportionately policed for marijuana crimes;
(iv) an applicant with at least 66 percent ownership by a person or persons who have resided for at least three of the last five years in a jurisdiction determined to be economically distressed; or
(v) an applicant with at least 66 percent ownership by a person or persons who graduated from a historically black college or university located in the Commonwealth.
Qualified Social Equity License applicants may be advantaged by a preferential process, reduced fees, and access to a low-interest business loan program.
Intentions Versus Reality in Social Equity Licensing (SEL)
While Virginia’s intentions behind these SEL’s are no doubt pure, in other states where social equity has been a stated goal the results have often times failed to materialize as intended and often with lawsuits and delays as unintended consequences. On opposite ends of the country Virginia can learn from its neighbor Maryland as well as California as to the challenges facing SEL rollouts. In 2016 when Maryland rolled out its medical marijuana licensing with diversity as an important initiative, it found itself in court defending the licensing process once it came out that none of the 15 companies that won cultivation permits are led by African-Americans. California roll outs faced a wide variety of lawsuits from its SEL process as accusations emerged in Los Angeles that the city was not following its SEL criteria and awarding unqualified applicants. LA also faced problems from non SEL applicants who have argued that the only way to get a dispensary license is through the SEL process leaving others on the outside looking in.
Virginia’s Window to get it Right
Virginia gave itself some breathing room by pushing the decisions on the final regulatory framework to 2022; and for the market to come online in 2024. Over the next year the various boards will be stood up and the internal debates will begin as to how to actually roll out adult use cannabis retail. With many examples of how other states rolled out their markets, Virginia would be wise to reflect on some common mistakes. By focussing on a few areas that are ripe for conflict, Virginia may be able to avoid some obvious landmines. Those include, fairness and transparency in the SEL process; maximizing opportunities for local owned businesses over the spread of multi state operators; and by avoiding arbitrary or otherwise unfair application determinations.