ALBANY — The beleaguered rollout of New York’s legalized marijuana trade is facing another potential setback after the state’s Medical Cannabis Industry Association filed a lawsuit Wednesday challenging the constitutionality of what they allege is a punitive $20 million fee that’s required for medical cannabis operators to enter the retail marketplace.
The lawsuit contends that regulation that requires registered medical marijuana companies to make four payments of $5 million as a condition of entering the retail market is so “onerous” that it essentially constitutes a “regulatory taking” of their business — and at a time when the number of individuals with valid marijuana prescriptions in New York has been plummeting. The fallout, they said, has also deprived the state of tax revenue, kept medical operators out of the retail cannabis market and inhibited medical marijuana patients’ access to products.
The lawsuit, filed in state Supreme Court in Albany, asserts that New York’s cannabis regulators conceived the fee as a “de facto tax… to effectively exclude the (medical registered organizations) from the adult-use retail market altogether.”
The litigation was filed more than two years after the $20 million fee was first proposed and subsequently became the subject of continued negotiations between the medical industry, the governor’s office, lawmakers and cannabis regulators. But after those talks recently broke down, the medical industry stakeholders pursued their lawsuit.
A focus of the litigation is that the law that legalized marijuana in New York more than three years ago had provided for an undetermined one-time fee for medical companies to enter the retail market as being “an amount to adequately fund social and economic equity and incubator assistance.”
But the medical marijuana industry’s lawsuit contends that New York’s cannabis regulators have acknowledged they disregarded that directive as written in the law and instead “devised the fee to ‘facilitate fair competition amongst all operators.’” The $20 million fee, they noted, is more than six times what any other state has charged medical marijuana companies to enter the retail sector.
Ngiste Abebe, a spokeswoman for the New York Medical Cannabis Industry Association, said the organization has been warning state officials about the damage that’s occurred in the medical program as the rollout was heavily focused on the corporate structure of the different entities that are licensed and less on other policy impediments, including the devastating impact that illicit sales have had on the marketplace.
“We brought the examples from various states, like Oregon, that had isolated their medical programs only to see them collapse,” Abebe said. “It’s very unfortunate to see that fear becoming realized, because not only has one (medical registered organization) relinquished its license, which also closed four dispensaries, four others have closed between one and three medical dispensaries, and nearly 400 cannabis employees have been laid off in the last 12 months.”
Those closures also have limited the options for medical marijuana patients with prescriptions. Their numbers had already been sharply declining in the wake of the increase in both licensed retail shops and illicit sales; and with fewer medical patients there has been a decrease in medical sales, another factor that’s hurt those companies. The decline has also impeded the ability of patients to obtain medical guidance for marijuana prescriptions.
Other points raised in the lawsuit filed Wednesday afternoon include that a status report by the state Office of Cannabis Management this year noted that no money of the medical company fees that have been collected have been used for the “administration of incubators” or to provide other assistance to social and economic equity applicants. The complaint also alleges the licensing fee, which is structured more as a tax, is unconstitutional because regulators have claimed it is being imposed to promote “fair competition,” rather than for the administration of the licensing program.
The civil complaint also alleges the fee is so disparate in comparison with other states that have legalized marijuana that it violates the Constitution’s Equal Protection Clause.
“New York’s repeated attempts to block medical cannabis providers from participation in the adult-use market is unacceptable, but sadly, not surprising,” said Matthew Schweber, an attorney with Feuerstein Kulick LLP, which specializes in cannabis laws and represents the state’s medical cannabis association in the case. “Regulators here show an irrational and unconstitutional animus towards medical providers since their appointment in September 2021.”
The civil complaint seeks a court order deeming the fee to be unconstitutional and for it to be invalidated.
The litigation is the latest legal challenge facing New York’s cannabis regulators — who have lost numerous constitutional challenges over the past three years and weathered dozens of lawsuits challenging their regulations.
Medical companies were held out of the retail cannabis market for the first three years of the rollout and their ability to enter it — even at a high price — has been questioned by other industry stakeholders, including cultivators, who have argued that the state’s poor execution had already crippled smaller vendors in various aspects of the market. Indeed, many licensed retail store owners had to wait far longer than expected to open, while many cultivators and processors found themselves with mountains of product but not enough storefronts to sell it.
Last year, as lawmakers considered moving up the timeline for medical companies to enter the retail market, the Cannabis Association of New York issued a memo criticizing the decision.
“Now is not the time for massive out-of-state corporate special interests to jump the line, and be given special treatment, especially while small and midscale (New York) operators are struggling,” CANY said in a memo in June 2023.
The medical marijuana industry has pushed back, noting that state regulators and others have demonstrated a consistent pattern of hostility toward registered organizations — medical cannabis operators — and cast them as “big cannabis” that would destroy the marketplace for small operators and “social equity” licensees that include those with past marijuana convictions. But the medical industry stakeholders contend that characterization is misplaced and fails to recognize the financial stability they have brought to the industry while upholding the medical program for years.
The retail marijuana market was especially harmed by the proliferation of illicit marijuana shops that exploded across the state. They have been fueled, in part, by the lawmakers’ decision to immediately legalize marijuana possession when the law was passed in April 2021 — long before the retail market would begin taking shape. Many law enforcement agencies had been reluctant to target those shops or street sales because of the decriminalization of the drug and criticism that marijuana arrests for decades had unfairly impacted minority communities.
But the Cannabis Control Board then adopted new regulations intended to strengthen enforcement efforts against the thousands of unlicensed shops. The new rules empowered the Office of Cannabis Management to work with police agencies to seize illegal product, issue fines and close shops that were not in compliance.
H/T: www.timesunion.com
