Counseling Cannabis: Attorneys debrief the state of the industry

Many cannabis activists may roll their eyes at a lawyer on the cover of a marijuana trade magazine.  But for serious facility operators, who better to talk to about the state of Missouri’s industry than those at the front line of all regulatory interactions and handling licensees’ internal and proprietary dealings?

It’s been 18 months since DHSS awarded the first facility licenses. There are just shy of 140 active ownership groups, ranging from independent mom and pop dispensaries to multi-million dollar vertical corporations – all with the same goals and rules to follow. 

Greenway talked to four of the most active lawyers in the industry to get them on the record. Over half of dispensaries are operational and open to the public. More cultivators and manufacturers come online each week, and patients see fewer and fewer supply shortages and more and more product offerings with each visit. 

WHO IS ERIC WALTER

Eric Walter, featured, had been following the development of Illinois’s medical marijuana law and program for the first half of 2014. After joining Armstrong Teasdale in July 2014, a mentor mentioned that one way to differentiate yourself is to identify a new practice area for the firm. Shortly after that, a business contact asked Walter if he would review his employment contract as an officer with a company that planned to file for multiple medical marijuana licenses in Illinois. 

He responded that he “would rather represent the company and assist it with preparing and filing its applications. The company had already identified an application writer, but we earned an audience with the key decision-maker and were able to persuade the client to give us the opportunity. We were successful, and that led to continuing opportunities in the space.”

Walter is currently outside general counsel to MoCannTrade and represents numerous license holders and aspiring groups. He also leads Armstrong Teasdale’s national Marijuana and Hemp Law practice area and chairs the Bar Association of Metropolitan St. Louis’s Marijuana Law Committee.

Walter’s leadership has nourished a culture of collaboration for most of the industry’s legal community, whether the focus is compliance, application writing, appeals, or other regulatory involvement. 

He met fellow Armstrong Teasdale partner Jaimie Mansfield during the 2019 application process. Mansfield is part of the Financial and Real Estate Services practice group at Armstrong Teasdale, where she assists clients with various real estate-related matters.

“Our clients were looking for some assistance with vetting certain sites with local municipalities against their zoning regulations, or lack thereof,” Mansfield said. “From there, I was hooked and excited to be at the ground level of an emerging, new industry. I helped review applications and was there when our clients uploaded everything into Complia! It was pretty thrilling! And even more when they won!

“Working with Eric has been one of my greatest honors as a practicing attorney,” Mansfield said. “Eric is passionate about this area. He is smart. He is funny (super funny). He is authentic. But perhaps what the world may not know about Eric, and what I want everyone to know, is that he sees the potential in people that sometimes don’t see it in themselves. He does everything he can to ensure that those people feel valued, respected and supported. He does this for his clients, no doubt, and for members of his team. He is the epitome of a team player. His success is built upon propping others up. I am fortunate to have his support and, even more so, to count him as a friend.”

Beyond Armstrong Teasdale, Walter continues to directly collaborate with other industry legal leaders, such as Dan Welsh, counsel at Hein Schneider and Bond. 

“Eric and I have compared notes with regularity on the myriad of legal issues that affect our clients since the inception of the program,” Welsh said. “I find the exchange of ideas on complicated legal issues to be invaluable in the practice of law. This process can be even more valuable in the ever-changing cannabis industry.”

STATE OF THE INDUSTRY

The “state of the industry” may look a little different from the vantage point of those penning the legal history of the industrial roll-out, being on the front lines from beginning to perpetuity, handing day to day relations for clients, whether it be regulators, business partners, or internal needs. 

The day-to-day operations of the state’s regulatory body for medical marijuana, the Section for Medical Marijuana Regulation, falls under the Missouri Department of Health and Senior Services. Communicating between the Section and Department has set many apart, mainly as the State handles a continuing wave of commencement inspection requests from operators anxious to operate.

“I have been fortunate enough to have an excellent working relationship with DHSS,” Walter said. “As a former Missouri Assistant Attorney General, I can appreciate the challenges of being a state employee, and my clients at that time were other state agencies (professional licensing boards). That experience has helped me understand the dynamic between a state agency and the subject of that agency’s regulatory authority, and I believe that has helped me gain a modicum of respect from the individuals at DHSS. I share the industry’s frustration over the time needed to receive decisions on variance and change requests. But I also know the volume of those requests has been overwhelming, and coupled with the scrutiny DHSS has faced, it is unsurprising that each one required significant attention, resulting in a slower process.”

None of the 2,163 original application groups could have fathomed the looming pandemic and economic uncertainty around the corner. Many industry watchdogs have ardently looked to other state program rollouts for clues of industry trends – most of which have been rendered useless. 

The resulting data watchdogs are using to forecast industry stability and health are weekly facility data and reports released by DHSS. With no similar comparable data, especially regarding variance and change requests, eyebrows continue to raise in the direction of request trends compared to commencement inspection numbers. 

“DHSS may tell me that I am very wrong, but the sense I have is that the number of variance and change requests is tapering off,” Walter said. “This has to be the case, given the number of licenses that have now been approved to commence. Even commenced licensees may need variance relief or a change request approved, but that is certainly the minority. My view also correlates with what I see as a shorter timeline, on average, for decisions from DHSS on variance requests and change requests. In terms of the state of the industry, fewer variance and change requests logically seem to translate into an increasingly stable industry to serve Missouri patients.”

One undeniable controversy throughout the state is the State’s choice to limit licenses to the constitutional minimums allowed by the program. The announcement of the license limit – and the original set of administrative rules – were released months before the 2-week application period. In those administrative rules is another ongoing controversy – the one-year operational deadline. 

At one year past the awarding of the original 60 cultivation facility licenses, 86 manufacturing facility licenses, and 192 dispensary licenses, a fraction of licensees had requested commencement inspections and received approval to operate. The vast majority of licensees requested a variance from the operational deadline rule. As of the publishing of this article, just over half of dispensaries are operational, with a third of cultivation facilities and a quarter of manufacturing facilities operating. 

But is the balance required for a capped license market met by an operational rule by the State?

“There is a connection between the two, but I believe it is fairly attenuated,” Walter said. “In every state but Oklahoma, the medical marijuana program has begun with a limited number of licenses. In my estimation, the operational deadline serves but one legitimate function: to deliver the regulated production of marijuana and marijuana-infused products to patients as quickly as possible after the constitutional amendment or statute passes. I do not like to think of the operational deadline as serving to punish licensees who fail to utilize the license fast enough. Every licensee has a built-in incentive to become operational as quickly as possible, as the economic benefits of being first – or early – to market are clear and obvious. The operational deadline helps in a capped license market like Missouri because once a licensee has missed the window to be among the first to become operational, it is easy to imagine licenses being on the sidelines and languishing while the licensee contemplates the best way forward. This would work to the detriment of patients by not delivering the amount of competition, product diversity, and supply that Amendment 2’s drafters believed appropriate for Missouri’s anticipated medical marijuana market.”

Missouri’s operators were met by swaths of issues, mainly resulting from the pandemic, but some resulting from other external factors. However, Missouri now has more operational dispensaries than any other state per capita except for Oklahoma. 

While some controversies around the program persist, Missouri’s industry has begun to flourish.  In addition to the ever-growing number of operational facilities, the patient count has officially cracked six digits and continues to grow on a stable, gradual trajectory. Reflecting that are the weekly cumulative sales numbers, showing most weeks breaking the previous week’s record for sales. It is undeniable that Missouri’s industry has delivered and will continue to improve.

“I think both patients and advocates alike should rest assured that there are some great Missouri-based companies in the program who are very close to producing quality medicinal products for the patients of Missouri,” Welsh said.

Mansfield echoed Welsh’s sentiment about the state of the industry, saying it is “well-positioned for immense success, not only for its patients’ health but also for the state’s financial health.” She also said the best part of the industry is “hands down, the clients. They are smart, fast-moving, entrepreneurial, and most importantly, caring – about their business, their employees, and most of all, Missouri patients.”

Walter believed the industry would be where it is today when he first began – with one caveat, “I was not optimistic that it would be in Missouri as early as it was, or that the industry would enjoy as much popular support in this state as it has,” he said. “That is a testament to the ever-increasing recognition that marijuana has genuine medicinal properties that make it an excellent alternative to conventional medications.”

Welsh previously represented entrepreneurial clients in highly regulated industries his entire career. “I have also spent a lot of time assisting clients with real estate development/zoning projects, technical writing assignments, and high-stakes initiatives. As a result, I was contacted by a number of clients before the passage of Amendment 2 to assist with their entry into the medical marijuana space.”

Welsh noted, “it is rare to have the opportunity to participate in the creation of a brand new industry. It is certainly unique and rewarding to witness years of hard work jump off the paper and become reality. The entrepreneurial spirit is certainly alive and well in Missouri, and the regulatory environment never stops changing.”

ROAD TO 2022

   

The industry is undeniably gaining mainstream momentum across the state. Many eyes have begun looking at 2022 as the time for Missouri to expand its program to include adult-use marijuana. 

Walter said the continual effort to refine and improve the regulatory environment is one of the most rewarding parts of his involvement. 

“Like most states, Missouri looked to the states that had gone before us to learn what regulations made sense for a new medical marijuana industry,” Walter said. “But the national/global industry is constantly evolving, and the regulatory environment in many states has fallen out of step with the industry’s abilities and the patients’ needs and wants. MoCannTrade has brought together an exceptional collection of industry talent and knowledge with a group of outstanding legal and political representatives. Working together, we have been able to translate the industry information into proposed regulations, proposed amendments, or guidance that we believe fits within Amendment 2’s boundaries and presented it to DHSS for consideration while also respecting what we understand to be Missouri’s regulatory and political priorities. The work is challenging but rewarding to the patients and the industry.”

Denise McCracken, founder and attorney-at-law at Dogwood Advisors, sees the next initiative as an opportunity to clarify the program.

“An adult-use initiative petition can also refine language in Section 1, Article XIV of the Missouri Constitution which legalized medical cannabis,” McCracken said. “Over the past three years, we’ve heard different arguments on how to interpret the definition of medical marijuana-infused products, particularly smokable products; whether or not zip code unemployment data is a valid measure for identifying and helping economically disadvantaged communities; the disclosure of licensee information that protects the confidentiality of proprietary information and affords government oversight; and the services and goods that each facility type can provide that allows for innovation while also protecting the profitability of each facility type.” 

In addition to the expansion, this campaign will create opportunities for many to improve the program. For some lawyers, opportunities they see relate to the “devil’s in the details” – and how they created virtually incomparable distractions for industry operations.

“One area that would benefit from clarification is Amendment 2’s grant of ‘time, place, and manner’ authority to local governments,” Walter said. “In particular, many believed that Amendment 2 ‘distance requirement’ provision was only intended to permit local governments to adjust downward the requirement that medical marijuana facilities be at least 1,000 feet from churches, schools, and daycares. But some local governments did not view that list (churches, schools, and daycares) as exhaustive, and they set out to impose additional distance requirements that Amendment 2 arguably precluded, at least implicitly. These included distance requirements from a host of other places like libraries, playgrounds, and parks (and drinking fountains, birdhouses, and ‘babbling brooks’). The most egregious example was some local governments prohibiting a facility from being situated within a certain number of feet from any residential zoning district, which in some cases completely eliminated all the municipalities’ commercial zones. Plainly, some of the local governments intended to create a framework that served but one function: to discourage any facility license applicant from proposing to situate in that jurisdiction. And it worked, notwithstanding Amendment 2’s prohibition on ordinances or regulations that impose an undue burden on medical marijuana facilities. The local government leaders likely understood that the facilities had neither the time nor resources to ‘fight city hall’ and would instead choose to situate in a jurisdiction where their economic activity would be welcomed and appreciated.”

To Mansfield, some of these restrictions inadvertently limit local engagement from well-meaning operators. 

“The real estate attorney in me wants to ensure that operators keep their local city planners and administrators informed and excited about what you are doing for the community and its residents!” Mansfield said. “You truly do become part of the fabric of the city, and as you grow, that relationship will be important!”

Welsh thinks that there is “always room for improvement, irrespective of what happens with the adult-use initiative next year. Having said that, I think the majority of Missourians support adult use in Missouri. I also believe that the adult-use initiative that is being assembled is both thoughtful and additive to the program generally.”

The ancillary industry – attorneys included – is making preparations for the expansion of the marijuana market in Missouri. 

Armstrong Teasdale, in particular,  already represents clients that hold adult-use licenses in states where it is legal, e.g., Arizona, Illinois, Colorado. “We are certainly prepared to assist Missouri clients in the future when Missouri adopts an adult-use program,” Walter said.

“The state of the industry is good, notwithstanding the appeals,” Walter said. “The appeals reflect more about the scoring process than anything about the industry as a whole. By and large, I believe the industry is watching the appeals and worrying whether the result will be a situation where there are simply too many licenses, and we approach an untenable situation like the disaster occurring every day in Oklahoma, where there are significant quality and safety concerns driven by ‘race to the bottom’ that evolves in a such an over-crowded, hypercompetitive environment.”

APPEALS INSIGHT

As a solo practitioner under the newly created office of D.B. McCracken Law, McCracken watched the hard-fought effort to get medical marijuana on Missouri’s 2016 ballot. 

“From there, I inserted myself into existing networks and developed my own connections with diverse people interested in different parts of the cannabis industry,” McCracken said. “I stick with it because cannabis law is a fascinating new practice area that is constantly developing within the executive, legislative, and judicial branches of government. Plus, my clients are a pleasure to work with and the best in the business.”

McCracken has become a leader on the appeals, compliance, and commencement front for many operators. She said a unique part of working in this industry is the people who are applying years of legacy experience in an industry that becomes more conventional by the day.

Her advice for those navigating the application and resulting appeals process? Watch the discovery litigation closely. 

How the appeals circuit for applicants became one of the most exciting part of the industry for watchdogs is a nod to the intricacies of compliant operations – but Welsh reminds watchdogs that while it is fascinating to see such high application and appeals numbers, it is important to keep perspective of the big picture.

“In spite of the large number of appeals that have been filed, not all of them are meritorious,” Welsh said. “In addition, litigation can be uncertain, unpredictable, and expensive. I think it’s important for all appellants to make an honest assessment of their claims and make fully informed decisions on behalf of your company. 

Over the next 6 to 12 months, the license dust will begin to settle as struggling operations fail and new ones start up. Meanwhile, most appeals will fall off and more licenses will be awarded to fill the constitutional minimum of licenses for each type. Already several new licenses have been awarded, while several more settlements are going through negotiations. 

“For the first 12 months of the appeals, DHSS openly expressed absolutely no interest in settlement,” Walter said. “But more recently, DHSS’s general counsel’s office, and the outside counsel representing DHSS in the appeals, had indicated that DHSS is warming to the possibility of settling strong appeals, particularly if the appellant has multiple appeals it is willing to dismiss in exchange for a relatively small number of licenses. As cases finally begin to move to hearings, DHSS will look for opportunities to resolve strong appeals to mitigate the total number of licenses that end up being issued. But I suspect that DHSS will continue to decline any interest in settling appeals it views as substantively weak, irrespective of the number of appeals that appellant has.”

OPERATIONAL INSIGHT

The pandemic resulted in a variety of unexpected challenges for operators, whether it be construction materials or logistics issues or even contractor shortages.

One in particular sticks out to Walter.

“I have heard many stories about the challenges of hiring well-qualified employees with relevant experience,” Walter said. “This is not especially surprising, given that this is an entirely new industry and how many facility licenses were issued. Many licensees were fortunate to be able to “lure home” former Missourians who had been gaining invaluable experience working in other states’ legal marijuana industries. Unfortunately, while I love Missouri, it is not quite as attractive of a destination as other legal states like Colorado, California, and Michigan, so persuading people with no connection to the state to move here has proven fairly challenging. This problem will resolve itself as the licensees’ knowledgeable employees educate everyone else on industry best practices.”

As state operations go from application to reality, the new focus shifts from commencement stress to ongoing operational compliance.

Welsh said one piece of advice he would give operators is to “develop a strong compliance department, properly support it, and allow compliance to be your north star for all company decision-making – at all levels.”

From seed to sale, compliance support is a focus to ensure operators are within the realms of state law and rules. Though rules are rigid for operators, they are not creatively stifling. 

“Operators and regulators are both learning how cannabis will move in Missouri from seed to its medicinal impact on each patient,” McCracken said. “Talk through compliance issues with your team, professional allies, and friendly DHSS rep. I have yet to find anyone in DHSS who is not willing to work through an ingenious business idea that weaves between regulations with a licensee who is earnest about maintaining compliance. If you do come across that person, politely persist.”

Welsh said every day presents a brand new set of challenges for Missouri operators. 

“The ability to remain calm, cool, and collected during turbulent times is a valuable quality,” Welsh said.