Arkansas Judge Halts Marijuana-Farm Permits

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Photo Credit: DEMOCRAT-GAZETTE

A Pulaski County circuit judge on Wednesday stopped the state from issuing Arkansas’ first five medical marijuana growing permits, casting uncertainty over the future of the new industry.

Circuit Judge Wendell Griffen granted a request by Naturalis Health LLC, which submitted the 39th-ranked cultivation application, to prevent the Arkansas Medical Marijuana Commission from formally awarding the coveted licenses at a meeting scheduled for Wednesday evening.

Naturalis Health was one of two disgruntled applicants to file lawsuits against the commission Tuesday, taking issue with the commission’s process for evaluating the 95 medical marijuana cultivation applications. The other company — Marianna-based Delta Cannabinoid Corp. — filed its complaint in Lee County.

After Griffen issued his temporary restraining order, the commission postponed its Wednesday meeting, “pending further guidance from the court,” according to a spokesman. A preliminary injunction hearing is scheduled for 10 a.m. Friday.

The snag makes Arkansas the latest state to have the rollout of its medical marijuana program bogged down by legal challenges. Ohio, Maryland and Pennsylvania dealt with similar delays last year, some of which remain ongoing.

Philadelphia attorney Joshua Horn, co-chairman of Pennsylvania-based Fox Rothschild’s cannabis law practice, has represented clients in several other states. Legal challenges like those in the Natural State are par for the course, he said.

“The reason why, I think, is so many people look at Colorado and think, ‘Boy, if I get a license, I’ll never have to work another day in my life,'” Horn said. “I hate to break it to you, but you’re probably not going to make a profit for the first two or three years.”

The legal challenges will delay the availability of the medical-grade cannabis for patients with one of 18 qualifying conditions — a concern for many patient advocates.

The first five cultivators — Natural State Medicinals Cultivation, Bolt Team LLC, Natural State Wellness Enterprises, Osage Creek Cultivation and Delta Medical Cannabis Co. — had planned to begin constructing growing facilities immediately after receiving their licenses.

An attorney for one group has said the lawsuits lack merit, and representatives for other groups have not commented on the cases.

Arkansas Attorney General Leslie Rutledge’s office will represent the commission.

“The temporary order issued today only applies until Judge Griffen holds a hearing this Friday and rules on the plaintiff’s request for a preliminary injunction,” Nicole Waugh, a Rutledge spokesman, said in a Wednesday email. “We will respond to the plaintiff’s arguments in due course.”

The five-member Medical Marijuana Commission was formed to issue licenses for up to eight cultivation facilities and 40 dispensaries after Arkansans voted to legalize medical marijuana through a constitutional amendment — Amendment 98 — in 2016.

The commission decided to award five growing permits and 32 dispensary permits to start. It created criteria for grading the applications that range from an applicant’s ability to comply with the plethora of medical marijuana laws to an ownership group’s diversity.

The commission received 95 cultivation facility proposals and 227 dispensary applications. Commissioners, who scored the applications themselves, released their evaluations of the cultivation applications on Feb. 27; they’re currently grading the dispensary proposals.

In the two weeks that have passed since the commission’s last meeting, all five of the top-scoring cultivation companies have paid the $100,000 licensing fee and posted the required $500,000 performance bond.

The commission has also received objections from at least four applicants about how proposals were scored.

Naturalis Health and Delta Cannabinoid both complained about the commission’s grading process in their court filings, calling the evaluations arbitrary and capricious and accusing two commissioners of conflicts of interest in grading winning applications.

Delta Cannabinoid, whose ownership includes retired state Court of Appeals Judge Olly Neal of Marianna, also said the commission failed to adequately consider racial and gender diversity, as stated in its guidelines.

“Four out of the five winners received these bonus points for having 51% or more ownership by women, many of whom do not appear involved in governance or operations of the entities and who are spouses or relatives of other owners,” attorneys for the company wrote.

Naturalis Health, whose managing member is Jackson T. Stephens III, the son of millionaire businessman Steve Stephens, said in its complaint that Commissioner Travis Story had a conflict of interest when grading Osage Creek Cultivation’s application, citing reporting in this newspaper. Osage Creek’s owners are clients of Story’s law firm in non-marijuana related matters. Story also is the subject of a complaint filed with the Arkansas Ethics Commission by Neal.

Naturalis also said another commission member, Dr. J. Carlos Roman, gave preferential treatment to the highest-scoring applicant, Natural State Medicinals, whose ownership group includes Dr. Scott Michael Schlesinger, an “extremely close personal and professional” friend of Roman’s, according to the suit. Roman gave a far higher score to Schlesinger’s group than any of the other applicants.

The lawsuits also questioned inconsistencies among similar applications and echoed previous concerns about back taxes owed by some individuals who applied.

Griffen, in his order, said Naturalis Health “asserts facts showing a substantial likelihood of success on the merits regarding violations of the Administrative Procedure Act, due process and equal protection.”

Griffen’s ruling was an unexpected win for unsuccessful applicants, according to several attorneys who doubted whether a company could succeed in circuit court after a recent Arkansas Supreme Court ruling affirming the state’s immunity from lawsuits in its courts.

Little Rock attorney David Couch, who drafted Amendment 98, said he doesn’t think sovereign immunity applies in cases in which applicants appeal Medical Marijuana Commission decisions in circuit court. That process is spelled out in the amendment, giving it the full force of the state constitution, Couch said.

Naturalis, in its suit, also asked that the applications for growing permits be re-scored, suggesting Griffen order an “independent review” from an outside, independent group.

“[Two] medical doctors, a pharmacist and a business professional. … While these occupations are admirable, these individuals did not have the requisite expertise or training to undertake the arduous task of grading voluminous applications in a very complex industry, as evidenced by blatant issues which plagued the scoring process, all of which were arbitrary, capricious and characterized by an abuse of discretion,” the suit states.

The commission rejected suggestions from industry insiders to have a third-party consultant grade the applications at the beginning of the process.

Couch, who is a member of one cultivation group that scored outside the top five, said when he drafted the amendment, he anticipated that the governor, Senate president pro tempore and House speaker would appoint members to the commission who had backgrounds in accounting or business — not medicine.

The commission was created only to issue the cultivation and dispensary licenses — not regulate the actual products.

Couch, who is also an Arkansas Medical Marijuana Association board member, said the commission should go ahead and have a third-party group score the dispensary applications.

“At this point in time, if I was a commissioner, given the uncertainty and the fact you want public confidence in this process, I’d for sure ship off the [dispensary applications], and I’d probably do a new evaluation for the [cultivation licenses],” he said.

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