As we near the close of public comments on proposed medical marijuana regulations to DHSS in Missouri, the final push is on to ensure regulators hear the voice of the people, patients, small business owners, and caregivers who will be effected by Missouri Amendment 2. One item that has drawn mass criticism is the Department’s draft capital requirements on medical marijuana business licensing applicants.
The Merit Based Scoring System
To start, Missouri has a merit-based scoring system where it will allocate points on licensing applications to determine who will be awarded the coveted few licenses to open a medical marijuana business in Missouri. There will be 60 cultivation licenses, 85 manufacturing licenses, and 192 dispensary licenses (24 per each of the 8 congressional districts). The licenses will be scored using a proposed system of 144 questions, each allocated a certain number of points. One segment of scoring is capital requirements.
What is a capital requirement in terms medical marijuana licensing? According to DHSS’s draft licensing application questions, a cultivator will have to show $300,000 liquid, available capital and manufacturer or dispensary applicant $150,000. (There are other requirements for testing labs and transportation as well; see draft question number 19). In plain English, this means that anyone trying to apply to get a license to grow, manufacture edibles, or sell marijuana will have to prove to the Department they have $300,000 or $150,000 lying around, ready to spend, in an account. Who has that kind of money? There’s one name in the industry that immediately comes to mind…Adolphus Busch. Yes, the very same Busch as the mega-corporate beer company.
I asked myself if capital requirements were normal for any business model, and did some research. You know what I discovered? There are only TWO industries in this country where capital requirements are the standard: banking and insurance. Why? Because of two reasons: (1) on demand payment of liabilities and (2) unforeseen events. In layman’s terms, on demand payment of liabilities is just a legalese way of saying that whoever has the money might be required to immediately pay over a chunk of it on demand. Example: if you go to the bank and demand to close out your account, the bank HAS to give you all your money. They don’t know when you will do this, so they have to be ready in case you decide to move or close your account. You won’t be told to come back in a week or wait a month; you will be entitled to immediate possession of your funds. Likewise, in insurance, if you rear end someone on your way home, and they file an insurance claim, the insurer will be asked to pay that claim on demand to the person you hit. The money has to be readily available.
By why on earth would this apply to a grower? Do any other farmers have to maintain capital? Of course not. And why would it apply to a retail store that sells groceries? It doesn’t. Marijuana is more like the food and beverage industry, not the banking and insurance industry.
Okay, so maybe these businesses won’t have to pay anything on demand, but what if some terrible accident or unforeseen event occurs? Well, the draft questions seem to contemplate that, too. Questions 20-24 require all manner of insurance to be obtained by the applicant: professional liability insurance, product liability insurance, business interruption insurance, property insurance, marijuana loss insurance…so why the need for capital requirements? Wouldn’t insurance be sufficient? It should be.
Pay to Play and Crony Capitalism
As K.C. Stark pointed out in his blog, this amounts to a pay-to-play scheme where the capital requirements serve only one purpose: to unduly burden applicants in a way that nearly ensures that only the old money corporate tycoons can corner the market and squeeze out the small local entrepreneurs. Forcing dispensary owners to keep a pharmacist on retainer, for example, is another such unnecessary business expense that increases the cost of doing business. Most pharmacists have not been trained in cannabis, because cannabis is a Schedule I narcotic under the federal Controlled Substances Act; Schedule I means that there is NO recognized medical use. So why train anyone on how to administer cannabis or even differentiate between strains if it is nationally prohibited? What information can a pharmacist possibly provide that the patient cannot already obtain from a doctor? The added cost of business increases the cost of the product that the patient will buy, and the more unnecessary requirements, the higher the expense for both business owners and patients alike. It is contrary to patient access, and hypocritical of the DHSS to then additionally require dispensary owners to try and garner extra application points for having a plan to make marijuana affordable for low-income patients. Many of these patients are likely to be driven to the black market of untested and potentially less safe cannabis in search of affordable prices….the very thing these regulations are supposedly geared towards preventing. Further, states who try to highly regulate while at the same time protect a patient’s right to home grow have seen steep increases in black market activity for this reason. Just look at California or Michigan, where the more regulations and the steeper the requirements, the bigger the increase in black market activity.
Capital Requirements Are Unconstitutional
Capital requirements are arguable unconstitutional under Amendment 2, which prohibits the Department from imposing “undue burdens” on business applicants. But it may also be unconstitutional under the Constitution of the United States.
The 14th Amendment to the Constitution enshrines the concept of equal protection. In the Civil Rights Cases of 1883, Justice Bradley held that the amendment is limited to “state action” and that the amendment has “a deeper and broader scope. It nullifies and makes void all state legislation, and state action of every kind, which impairs the privileges and immunities of citizens of the United States, or which injures them in life, liberty or property without due process of law of which denies them the equal protection of the laws.”
In Allgeyer v. Louisiana, the Court protected private contracts of all stripes, ensuring freedom to contract. In this vein of case precedent, the Court struck down all types of state imposed laws from maximum numbers of hours an employee could work, to holding that the individual could “engage in any of the common occupations of life, acquire useful knowledge, to marry…and generally to enjoy those privileges long recognized at common law as essential to the orderly pursuit of happiness[.]”Meyer v. Nebraska, 1923. Despite this, the Court did uphold state prohibition laws in Kansas, laws declaring maximum work hours for women, and federal laws that regulated narcotics through taxation.
In 1880, Strauder v. West Virginia held that equal protection was, “designed to assure the colored race the enjoyment of all the civil rights that under the law are enjoyed by white persons, and to give that race the protection of the general government, in that enjoyment, whenever it should be denied by the States.” The clause means, simply put, that individuals in similar situations be treated equally by the law. The equal protection clause applies to the States via the 14th amendment and the federal government through the 5th amendment. Yick Wo v. Hopkins extended equal protection to all races, colors, and nationalities in 1886. Yick Wo was an interesting case that saw the Court strike down regulations discriminating against Chinese Americans looking to get into the laundry business.
There is a long line of affirmative action school admission cases where the court found that race could not be a determining factor in and of itself…unless there was no workable race-neutral alternative. Fisher v. University of Texas, 2013.
The law on equal protection has evolved from analyzing overly discriminatory laws and regulations (disparate treatment) to viewing laws in the light of whether they have a disparate impact. This means that the law may not be discriminatory on its face, but winds up having a discriminatory effect. This is true if the statistically significant impact was neither intended nor foreseen. (Although, because this blog post will be sent to the Department as a part of public comment, the Department is being put on notice of the foreseeability of a particular problem, soon to be described).
In Township of Mount Holly v. Mount Holly Gardens Citizens In Action, Inc., a redevelopment plan for a blighted New Jersey neighborhood attempted to transform the neighborhood into mid-range single-family dwellings. The current residents sued, arguing that the redevelopment plan violated the FHA because a majority of them would not be able to afford the new homes. The district court dismissed this argument, holding that the redevelopment plan affected Gardens residents equally, without regard to race, and was tied only to economic considerations. The court of appeals reversed that ruling, holding that the residents’ association had set out a case of discrimination under the theory of disparate impact because a majority of the affected residents were non-white.
Herein lies the rub of capital requirements. Go to Ferguson and ask any hopeful dispensary entrepreneur if they have $150,000 liquid capital to put up. How many do you think you’ll find? Go to the Troost corridor and ask around in the Opportunity Zones. When most banks won’t touch this industry, coming up with that kind of arbitrary capital requirement is next to impossible for historically disadvantaged groups who lack even traditional access to capital. There is no doubt that capital requirements will have a disparate impact on people of color who have been the most affected by the ill-advised war on drugs. While there are disproportionately more people of color still locked up for non-violent drug offenses, the Auggie Bushes who have deep pockets to fund ballot initiatives, lobby for favorable regulations, and who can pony up the capital requirements get rich off of an industry that has decimated nonviolent offenders of color. This is patently wrong.
Corruption and the Appearance of Impropriety
All of this has the distinctive stench of corruption and the appearance of impropriety. Eapen Thampy, an industry insider of over a decade, has traced the dirty details back many years through to the formation of patient advocacy groups funded by Busch. Four years ago, the framework for capital requirements were in the works; he opined that capital requirements were likely to lead to monopolization of the Missouri medical marijuana industry, just as has occurred in Illinois. Not only did he turn out to be right, but some of the major players that he has called out for these dirty pay-to-play schemes have since been prohibited – for life – from offering their consulting services to those who hope to enter the industry. Missouri deserves better and should demand better than politics as usual.
While Thampy opined that Amendment 2’s “maintaining competitiveness” in the marijuana market language was a hidden capital requirement, must we treat it as so? Nothing in Amendment 2 expressly requires DHSS to score or even require capital requirements. In fact, under the proposed scoring questions, capital requirements are listed as being tied to Amendment 2’s mandate to review the business plans of applicants. Nothing anywhere requires those business plans to meet a capital requirement. Who is the Department to say how much it will take to get an 800 square foot dispensary off the ground? I started my law practice with nothing…just a laptop and a printer in my living room. While a dispensary isn’t the same, the principal is a common vein among entrepreneurs who start successful businesses – like Apple – out of the humblest of beginnings. To impose capital requirements is to shackle an entrepreneur before they can even apply…but apparently not put them on notice before they paid DHSS a nonrefundable fee. Imposing capital requirements starts this industry in Missouri off on the wrong foot – an unethical foot – and undermines faith in government that is already on shaky ground after decades of unjust prohibition.
The foregoing reasons are more than adequate to justify abolishing capital requirements in this industry. When we look at the stats comparing alcohol to cannabis, alcohol causes thousands of deaths a year; cannabis does not. A liquor license in Missouri costs $150, the application is about 7 pages long and requires a criminal background check and proof that the business entity is in good standing. There are liquor stores everywhere. But cannabis seems to require thousands in non-refundable fees, limits on the number of businesses, capital requirements (announced after they gladly take the non-refundable fees, a deplorable and unethical practice), stringent licensing requirements amounting to a nearly 500-page application. This isn’t a nuclear power plant. Its a safe plant medicine and if this is really about patient access, then there should be more dispensaries than liquor stores and far fewer barriers to enter the market.