A new lawsuit sheds light on the licensing of 10 medical cannabis operators in New York in 2015 and 2016, raising questions about how regulators assessed the applications and whether other unsuccessful applicants could raise their own legal objections.
New lawsuits could slow the process of granting additional MMJ licenses – at a time when lawmakers and the governor are debating laws approving a new program for adult use.
In its lawsuit filed in the Albany County Supreme Court on February 5, New York-based Hudson Health Extracts (HHE) claims that its 2015 MMJ filing would have deserved a top 5 spot if it had not the “arbitrary, capricious and irrational decisions. “
Such litigation is not uncommon in marijuana licensing, nor is it the language of the allegations.
However, what makes the case of HHE so noticeable is that the company appears to have the qualifications needed to be a successful applicant:
- Capital of $ 18.6 million.
- Experience manufacturing medical cannabis in the highly regulated states of Connecticut and Minnesota.
- A research partnership agreement with Montefiore Medical Center in the Bronx.
- $ 1 million to secure real estate, including a manufacturing facility contract and pharmacy leases.
Nevertheless, HHE took 13th place out of 43 applicants with a financial rating of “average”.
If the company had received an “excellent” financial rating it would have won a license.
HHE was founded by Mitch Baruchowitz, managing partner of Merida Capital Holdings, a New York-based private equity firm.
Marijuana companies he co-founded included LeafLine Labs, which received an MMJ license in Minnesota, and Theraplant, which received a medical cannabis license in Connecticut.
It was years before HHE’s administrative appeal to New York State was heard and decided.
Finally, in July 2019, administrative judge William Lynch ruled that the Department of Health’s decision not to license HHE was correct, a position the state took in January 2020.
MMJ program dispute
Since launching in 2016, the New York medical marijuana program has generated revenue with half of its 10 vertical licenses. This is partly due to financial difficulties affecting the original licensees.
Nine of the ten current licensees are multi-state operators (see table above), with five having secured their licenses after purchasing them from a local company.
Some of the MSOs are struggling financially, notably Los Angeles-based MedMen Enterprises and New York-based iAnthus. The latter was financially restructured in a Canadian court.
Hudson Health Extracts argues in its lawsuit that “Much of the dysfunction currently affecting New York’s medical marijuana (marijuana) program is due to Departmental registrations to corporations … those who are operational and those of them The necessary financial resources were missing a capital-intensive cultivation facility, which operates a processing plant and has four retail locations spread across the state, instead of companies such as HHE, which had both operational competence and productive financing. “
HHE’s lawyers declined to comment beyond the lawsuit.
New York Department of Health’s information officer Jill Montag wrote in an email to Marijuana Business Daily that the agency “does not comment on any pending litigation.”
Some claims stand out
New Jersey’s cannabis lawyer Rob DiPisa said the suit was convincing.
But he added it was worth noting that the application process took place six years ago and New York was the first to license marijuana.
Observers need to be a little sensitive, he noted, because regulators “did not place sophisticated government officials with the responsibility of reviewing very technical aspects of the applications.”
Even so, DiPisa said three things impressed him about HHE’s claims:
- The lawsuit alleges a correlation between the amount companies spend lobbying local and state officials and those who have obtained licenses.
- Evaluating financial figures doesn’t require any sophistication. it’s pretty black and white.
- State regulators have changed the way they weight certain factors based on the lawsuit.
The lawsuit cites a 2017 Lower Hudson Journal News investigation that found that the six companies that spent the most on marijuana lobbying in New York had all obtained MMJ licenses.
In the Journal News report, a spokesman for the state health department denied the suggestion that money affects licensing decisions.
If HHE is licensed because of this challenge, DiPisa said, “Others may see this as an alternative way to obtain a license and then you may see more litigation and that could lead to a possible slowdown.” like what happened in New Jersey.
Avis Bulbulyan, CEO of Los Angeles-based cannabis consultancy Siva Enterprises, is closely watching the suit as he prepares the unsuccessful license application in New York for minority and doctor-led Alternative Medicine Associates (AMA).
If Hudson Health Extracts’ lawsuit is successful, Bulbulyan said he would like to know how the state will prepare for AMA to rank even higher than HHE on application ratings.
Bulbulyan said AMA, which has reserved its legal rights, had the second highest raw score, but the weighted average “put us in 12th place”.
He said “no other application process is as detailed and complicated and cumbersome” as that of New York. He emailed photos of AMA and submitted 10 boxes of banker applications.
HHE’s lawsuit stated that most applications were more than 1,000 pages and that the winning entries were an average of 2,000 pages.
“Whenever you get that detail, the scoring always gets pretty arbitrary,” said Bulbulyan.
“Average” financial situation
New York’s medical marijuana law, the Compassionate Care Act, was enacted in July 2014.
Five vertical licenses were issued in July 2015, and five more were issued about a year later from the original pool of 43 applicants.
New York has not issued any new MMJ licenses since then.
The state has 140,000 registered MMJ patients and 38 pharmacies, which, according to the Marijuana Business Factbook, will have sales of approximately $ 250-350 million this year.
For comparison, Florida, which only opened its market to full strength MMJ in 2017, has 491,370 patients, 315 pharmacies, and is expected to have sales of $ 1 billion to $ 1.225 billion this year.
HHE was one of at least 15 unsuccessful applicants who requested an administrative hearing.
The administrative hearings only started in January 2018 – 2½ years after the initial permits were issued.
A consolidated hearing with seven petitioners, including Hudson Health Extracts, ran through June 2018, then the cases were segregated and it took another year for the HHE case to reach a decision.
Judge Lynch concluded that three health department officials “credibly testified” that steps were being taken to promote consistency in the assessment process.
In its lawsuit, HHE argues that the state selected the three witnesses, at least 11 experts failed to testify in the case, and the company was not allowed to call refuting witnesses.
Despite its $ 18.6 million war chest, HHE was one of 38 applicants who, according to the lawsuit, received the same “average” score for financial standing.
“In other words, the department concluded (for some inexplicable reason) that HHE’s $ 18 million was equivalent to zero or negative balances submitted by other claimants,” the lawsuit said.
If Judge Lynch had simply corrected this “only glaring mistake” and awarded HHE one point more for its “excellent” financial performance, the company would have received an MMJ license.
HHE’s lawsuit took note of the state’s decision to license Bloomfield Industries, which was lacking capital. It was led by a 26-year-old with no prior experience and was reported to soon run into financial difficulties.
Bloomfield was sold at the beginning of the program – 2017 to MedMen.
One of the government application evaluators in the HHE case acknowledged that the evaluators did not have time to thoroughly review all applications as they were under pressure to complete the process within eight weeks.
“It really only packed and scored because we had a tight schedule for it. . . We did not have the luxury of reading these (applications) slowly, ”said State Health Department senior witness Dr. Anne Walsh, from.
Jeff Smith can be contacted at [email protected].