Member Blog: Illinois Adult-Use Dispensary Applicants Hope Licensing Process Doesn’t Go Up in Smoke

by Andrew M. Halbert, Fox Rothschild

Recently, after delays in issuing any adult-use dispensary licenses, Illinois has attempted to push ahead with simplifying the application and issuance process. Interestingly, this has occurred even as recent developments in ongoing litigation indicate potential further delays in issuing the previously awarded licenses that are currently in limbo, and in one case, even threaten to upend the entire process.

Delays and Initial Lottery Announcement

On September 3, 2020, after multiple delays, the Illinois Department of Financial and Professional Responsibility (“IDFPR”) announced the application scoring results for the initial 75 new adult-use dispensary licenses to be issued under the Illinois Cannabis Regulation and Tax Act (the “Act”). Only 21 of the 900-plus applicant groups had achieved a perfect score, and the available licenses would be awarded via a series of lotteries involving only those applicants. Although all 21 applicants with a perfect score were deemed too qualified for “social equity” status under the Act, there were public allegations that only 13 of the 21 accepted applicants were actually owned and controlled by people of color.

Faced with multiple lawsuits claiming various flaws in the process, the Governor suspended the initial lottery. He announced that IDFPR would distribute Supplemental Deficiency Notices explaining where applicants missed out on points, and providing an opportunity to correct any identified issues. Unfortunately, this satisfied neither the excluded applicants nor those applicants who had already received a perfect score, and litigation continued. As of May 1, 2022, none of the proposed new adult-use licenses have been issued.

HB 1443 and New Lotteries

In July 2021, the Illinois legislature adopted H.B. 1443 in an attempt to address social equity concerns and expedite the issuance of dispensary licenses. It established procedures for three adult-use dispensary lotteries to occur in July and August of 2021, in which a total of 185 adult-use dispensary licenses were to be issued.

The first lottery, for 55 new licenses, included only applicants that received 85% or more of the available points. The second lottery, also for 55 additional licenses, included applicants that received a score of 85% or higher and met the ownership and control requirements for Social Equity Applicants. Applicants that qualified for social equity status solely by hiring qualifying employees were excluded from this lottery. The final lottery, for the original 75 licenses, included the 21 applicants who initially received a perfect score, as well as an additional 134 applicants who perfected their application using the Supplemental Deficiency Notice process. Although IDFPR announced the winners, none of the licenses have been awarded yet due to the ongoing litigation.

More recently, on March 15, 2022, Governor Pritzker announced another planned lottery process to occur later this year to award 50 new adult-use dispensary licenses. The proposed rules governing this process were released on March 25, 2022, and include a new, simplified online application process and an administrative review provision designed to help address issues without the need for litigation.

Status of Litigation

As Illinois attempts to streamline its processes, three different ongoing lawsuits involving Illinois dispensary licenses have continued to progress, one of which threatens to upend the entire lottery process.

First, Wah v. IDFPR claims that the additional points given to veteran-owned applicants create a special class of applicants in violation of the Illinois constitution. The most recent relevant development, in this case, was the stay order that prevents IDFPR from issuing any of the 185 dispensary licenses until the issues raised in Wah have been resolved, which remains in place.

A second lawsuit, which is really a group of fourteen different lawsuits involving dozens of plaintiffs consolidated into one “supercase,” challenges the application process on the basis of alleged violations of Illinois administrative law, and asks that the plaintiffs be provided additional licenses beyond the 185 currently allocated. The judge in that case recently had the opportunity to take control over the stay in Wah, but declined. As a result, the resolution of this case will affect only the parties to the case, and will not affect the larger issue of the stayed licenses. At a recent hearing, the parties discussed a supplemental lottery process for the plaintiffs that would attempt to recreate the odds that those plaintiffs would have faced in the original lottery, had their applications not been improperly excluded, and the fact that plaintiffs would need to succeed in that lottery in order to have a viable claim to a license. IDFPR and the judge indicated their belief that this lottery should occur soon so that unsuccessful plaintiffs could avoid further litigation costs. However, not all plaintiffs were amenable to this proposal, raising the issue that if none of the plaintiffs were successful in the proposed lottery, IDFPR might never be held to account for any flaws in the application process.

Finally, a third case was recently filed that could upend the entire licensing process. That case, Finch, et al. v. Mario Tretor, Acting Secretary of IDFPR, 1:22-cv-0158 (N.D. Illinois, March 23, 2002), claims that granting additional application points to Illinois residents (as well as the Illinois residency requirements included in the qualifications for social equity status) should be deemed unconstitutional under what is known as the “dormant commerce clause” because it unfairly discriminates against residents of other states. The plaintiffs in Finch have already won a similar case in federal court challenging similar requirements in Missouri, so those watching the case closely are concerned that this court may reach a similar result. In addition, because this case challenges the constitutionality of the entire scoring process, a win for the plaintiffs could mean a reset for the entire licensing process, even affecting those 185 licenses that have already been awarded.

All that interested Illinois applicants can do now is wait, and hope that these issues are resolved soon and licenses are finally released. Once that happens, expect a flurry of activity as those lucky enough to receive a license seek capital and expertise, with some likely to explore options for selling their newly-acquired license.

Andrew Halbert is a member of the National Cannabis Law Practice at Fox Rothschild LLP, based in its Chicago office. He focuses his practice on representing public and private clients, including cannabis companies, in a broad range of transactions including: state and local cannabis regulatory and licensing transactions; stock and asset acquisitions and divestitures; mergers; tender offers; private equity investments; reorganizations; private offerings; and financing transactions facilitated through the issuance of equity and debt securities.

Commmittee Blog: NCIA’s Diversity, Equity, and Inclusion Committee Offers Critiques and Recommendations for Illinois Social Equity Dispensary Licensing Process

Illinois Cannabis shutterstock_1229211757

by NCIA’s Diversity, Equity, and Inclusion Committee

We are NCIA’s Diversity, Equity, and Inclusion Committee (DEIC), comprising experienced professionals representing a diverse range of backgrounds. In response to the early results of the Illinois Adult Use Dispensary application process, and with the interest of supporting Illinois’ Social Equity efforts, we felt compelled to reach out and offer our analysis and recommendations.

While the creation of the Social Equity Program in the Cannabis Regulation and Tax Act and Illinois Department of Financial and Professional Regulations (“IDFPR”) implementation of the licensing scheme was well-meaning and intentioned, the recent litany of lawsuits and outcry from advocacy groups following Illinois’ inaugural issuance of cannabis licenses indicates heavy criticism. As demonstrated thus far, the Social Equity Program appears limited in its ability to capture a sufficient representation of persons most harmed by the War on Drugs in Illinois in business licensure and ownership, or to generate the opportunities for restorative justice and building generational wealth for such persons as hoped.

Our intention with this letter is to state our express desire to lend the expertise and resources of NCIA’s DEIC to support Illinois legislators in crafting Illinois’ licensing and regulatory systems in a manner that reflects the Social Equity Program’s laudable mission of reducing barriers to cannabis business ownership, and establishing a legal cannabis industry that is equitable and accessible to those most harmed by the disparate enforcement of drug-related laws in Illinois. Furthermore, we hope to lend support to local organizations building toward that same goal, and to form a coalition as we all strive to rectify the harmful effects of prohibition and the War on Drugs.

At this time, and pending further collaboration with local officials, NCIA’s DEIC makes the following recommendations for your consideration. For further understanding of the analysis supporting these recommendations, please see the attached report.

For IDFPR to move forward with license scoring and issuance as soon as possible, we suggest the following:

Removing the required possession of premises and overhead to hold on to property (not required of dispensary applications and may bankrupt existing applicants awaiting results)
Ensuring oversight of KPMG (the 3rd-party firm hired by the State of Illinois to score the applications) by persons of color and social equity representatives
Allowing for a documented appeals process internally with KPMG results before issuing them to all applicants
Scrutinizing Operating Agreements in the rubric and gradient to ascertain and avoid predatory or straw-man agreements

Moving forward, reasonable transparency would include knowing what the makeup and process was for KPMG in making their first evaluations, and what the process will look like for the re-scoring to avoid conflicts of interest. Specifically, IDFPR can ensure transparency by making the following information public:

Evaluation Rubric
Composition of the Reviewers
Scoring Process and Determination of Grading
Frequency of KPMG Meetings
KPMG Public Relations Contact
Timeline of Events During the Scoring Process
Lessons Learned and Plan for Improvement on Future Scoring Rounds

For future rounds of applications, we offer these recommendations:

Pre-qualifying social equity applicants for state funding to ensure economic empowerment in the application process
Providing a path forward for those who are not (yet) qualified to operate a cannabis business, but are qualified as social equity applicants
Allowing for 100% Social Equity Applicant owned businesses to qualify for cannabis experience points without partnering with a multi-state operator (“MSO”)
Issuing delivery licenses for social equity operators

We also express our support for the recommendations made by the Cannabis Business Association of Illinois’ Minority Access Committee, in their October 5, 2020, letter to Governor Pritzker. (see here)

Finally, we appreciate the efforts taken by Governor Pritzker, the Illinois legislature, and IDFPR thus far to address disparities in the application process and commend Governor Pritzker for taking leadership on this important issue. Allowing this first generation of applicants to address deficiencies in their applications, as it was originally intended to allow them to do, offers another opportunity to enter the lottery system, which we recognize and appreciate.

Additionally, the commission of a disparity study is commendable and should prove helpful in understanding what went wrong and how to improve. If anything, we hope our expertise and professional experience will assist in this process and in the effort to improve upon the mistakes of the past to achieve a more diverse, inclusive, and socially equitable future.

Thank you for your time and attention to this matter. Please let us know if we can assist in any way.

Sincerely,

The National Cannabis Industry Association
Diversity, Equity, and Inclusion Committee

The full letter and analysis can be found here.

Member Blog: Legal Cannabis in Illinois – Expanded Possibilities For All

by Payal Shah, Cannabis Insight Collective

Today, Governor Jim Pritzker of Illinois signed the historic House Bill 1438, The Cannabis Regulation and Tax Act, into law, ending prohibition for recreational cannabis usage across the state, and making it the 11th state where cannabis is legal. I, along with so many others in Illinois, and around the United States, am just as excited as the Governor.

“The state of Illinois just made history, legalizing adult-use cannabis with the most equity-centric approach in the nation. This will have a transformational impact on our state, creating opportunity in the communities that need it most and giving so many a second chance.” – Governor Pritzker, IL

This is a game-changer for the state of Illinois and its constituents. Public health, education, and tourism are just a few of the areas that are expected to emerge victoriously by being some of the beneficiaries of the $170 million dollars in expected tax revenue in early years.

But to me, what’s even more extraordinary is the fact that within IL’s legalization law is a visionary plan that will serve as inspiration to advance the nation’s social equity movement in this industry.

With the end of cannabis prohibition, we see the beginning of the end to the “war on drugs” as we know it, one that shrouded lower-income and traditionally Latinx and African-American communities in an unjust and unfair light.

The ACLU states that people in the United States use and sell marijuana at roughly the same rate regardless of their race, yet a black person is almost four times more likely than a white person to be arrested for marijuana possession nationwide. In addition, roughly 13,000 people were deported or separated from their communities and families in 2013 alone for drug-related offenses.

Even the word marijuana itself can be considered negative and racist, based on a longstanding theory that narcotics agents in the 1930s chose a word of Mexican-Spanish origin over the more scientific word cannabis when crafting drug laws, making it sound more sinister and associated with a certain community.

The equitable measures put into place in Illinois’ cannabis legalization law are unprecedented when it comes to making sure the end of cannabis prohibition will result in brighter days for the masses, not just a select few.

A FAIR SHOT FOR ALL

New processing and cultivation licenses will be issued in mid-2020, with growers from communities negatively impacted the most by cannabis prohibition getting priority within the application process.

A SECOND CHANCE

Up to 770,000 people in Illinois qualify to have their marijuana convictions expunged from their criminal record, healing past wounds and providing access to new opportunities that weren’t available in the past because of past marijuana laws.

OPPORTUNITY FOR GROWTH

One quarter of cannabis taxes collected will fund a grant program that will invest in minority communities impacted most negatively by cannabis prohibition, driving cannabis business opportunities, by offering assistance and mentorship.

Even 2020 candidate Senator Kirsten Gillibrand shared her comprehensive plan to legalize marijuana on a Federal level immediately if she becomes president. In that plan, social equity is also the primary focus on the path to legalization.

“The unfair enforcement of our current marijuana laws is a continuation of the institutional racism that has defined our criminal justice system for decades… We’re talking about entire lives, families, and communities being derailed: felony convictions make it much harder to get and keep jobs, access financial loans, exercise the right to vote, travel abroad, and receive social and housing benefits.” – Senator Kirsten Gillibrand

And just recently, Chicago-based Cresco Labs launched its Social Equity & Educational Department (SEED), an initiative aimed at promoting inclusion, equality and community engagement, through community outreach, educational support and incubators for veteran, minority and women-owned businesses.

“Our SEED initiative is designed to ensure that all members of our society have the skills, knowledge and opportunity to work in and own businesses in this industry….the SEED initiative consists of impactful programs and actionable solutions-based approaches that we believe will help make the cannabis industry a highly inclusive force for job creation.” – Charlie Bachtell, CEO, Cresco Lab

I also believe in a fair and equitable cannabis industry that unites as one to fix the damage done within certain communities as a direct result of cannabis prohibition. The National Cannabis Industry Association, along with the Minority Cannabis Business Association, are helping to shape laws and create a roadmap for local governments to address social equity issues right from the start of legalization.

“It is fitting that the Land of Lincoln is moving forward with such extensive measures to reverse the damage done to people of color and low-income communities by the government’s senseless war on cannabis consumers. We cannot continue to pursue legalization without considering restorative justice, and Illinois is definitely starting on the right foot in this regard,” said Aaron Smith, executive director of the National Cannabis Industry Association (NCIA).

And as further fuel to ignite the social equity movement, with the end of prohibition in sight, we’re also seeing exponential growth in all sectors of cannabis business. And with that growth comes a highly qualified talent boom in cannabis, with executives from all industries making the move to join and imagine an exciting new space together, from all perspectives. One exciting space that cannabis businesses can look to Corporate America for inspiration is within Corporate Social Responsibility programs.

Corporate Social Responsibility programs, or CSR, is a way for companies to conduct their business in a manner that is ethical, while taking their social, economic and environmental impact, along with the consideration of human rights, into account. It can be a win-win situation for all parties involved – through CSR programs, businesses can benefit society while boosting their own brands. Most have probably heard of Tom’s Shoes, and their popular “One for One” CSR program, which donates a pair of shoes for every pair bought. General Electrics donated over $38 million to community and education programs in 2016. Disney has a “VoluntEARs” program, which allows all of their employees to use a portion of their hours towards volunteer efforts.

With so many new brands coming into the market following legalization, it’s important that they find a way to stand apart and above the competition, while delivering a relevant brand experience. In order to do that successfully, brands need to stand for something, something that matters to people. And what we’re hearing from legislators and constituents alike is that social equity in the cannabis industry matters a lot. It’s a space for us, as responsible cannabis business owners paving a path forward, to come together and share not only the secrets of their success, but also to share the gains with the entire cannabis community, in order to lift everyone up – to right the wrongs of the failed war on drugs.

The possibilities are limitless, just like the new frontier of cannabis. I look forward to seeing how we all grow together.

Payal Shah is founder and CEO of the Cannabis Insight Collective. She’s spent the last two decades in strategic planning, working in leadership roles within global advertising agencies, on blue-chip clients including Proctor & Gamble, Microsoft, Walmart, Kelloggs, and Porsche.

Her experience is focused on understanding how cultural paradigm shifts and trends impact and influence people, their behaviors and brand choices. Her knowledge is grounded in creating and cultivating online panels, or Collectives, of all sizes and shapes, to address a variety of challenges for various clients. This background, along with a compassion and conviction for the cannabis industry, inspire her to be an advocate to drive the cannabis industry forward.

Cannabis Insight Collective is a living, breathing online community of people across the United States, brought together by their connection to the cannabis industry. We exist to uncover cultural, category and consumer trends and insights within the category by tapping into our proprietary Collective, and working with people directly to answer questions that brands are struggling to answer.

At Cannabis Insight Collective, we are committed to supporting social equity in the cannabis market, and treating everyone fairly and respectively, through a number of Corporate Social Responsibility business initiatives:

The Cannabis Insight Collective panel will be representative of the entire United States population to ensure a representative voice is heard.
A percentage of CIC’s revenue will be donated to the advancement and mentorship of minority-owned cannabis businesses.
CIC will continue to advocate to establish new and existing laws that make sure the cannabis industry is fair and equitable.

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