Marijuana ‘social-equity’ program hit with lawsuit

A lawsuit filed Thursday seeks to stop Arizona’s social-equity marijuana shop program and prevent big dispensaries from snapping up the 26 lucrative licenses that are intended to help people harmed by old marijuana laws.

The litigation could delay the state’s plans to issue the licenses early next year.

The complaint filed in Maricopa County Superior Court says the rules don’t meet the requirements set out in Proposition 207 legalizing adult-use of marijuana, which voters overwhelmingly approved last year.

The measure also requires the state to establish a program for new marijuana shops to benefit communities negatively affected by the enforcement of previous marijuana laws.

The challenge was filed by Greater Phoenix Urban League, a nonprofit aimed at helping minority communities, and Acre 41, a group of women entrepreneurs who planned to apply for a marijuana shop license through the program.

Defendants are the state, the Department of Health Services and its director, and Gov. Doug Ducey. DHS declined to comment on the litigation Thursday.

The lawsuit asks the court to declare the rules invalid, order DHS to rewrite the rules to meet the requirements of the ballot initiative and prevent the state from accepting applications until that is done.

As a voter-approved initiative, state lawmakers and the governor are bound to the measure and cannot change it unless the change furthers its original purpose.

But the ballot measure left it to DHS to determine who would qualify for the program, and the agency began issuing draft rules earlier this year and released final criteria for applicants in October.

Among the criteria is having a record for a marijuana crime that could be expunged under the new law because that crime would not be illegal today.

DHS has planned to accept applications later this year and hold a lotterystyle drawing for winners early in 2022.

While the rules require the qualified applicant to own at least 51% of the operation, they also allow the applicant to sell to another dispensary, which doesn’t sit well with some people.

Concerns about ‘straw men’

One of the plaintiffs, Celestia Rodriguez of Acre 41, has had concerns from the start that under DHS rules, big dispensaries could use “straw men” who qualify for the program to serve as the applicants, and then buy out those people if they win a license, leaving the new dispensaries in the hands of existing dispensaries.

She said she qualifies to apply for one of the licenses, but does not believe the rules from DHS are fair and will achieve the goals of the program.

“My true intention is to make sure these 26 licenses stay with true socialequity licensees, as well as reinvest in and revitalize these neighborhoods that have been disproportionately affected,” Rodriguez said Thursday.

Dispensary companies have looked for people who qualify for the program to set up partnerships, with the dispensaries financially backing the qualified applicant.

The company that operates Sol Flower dispensaries has hung advertisements on doors in neighborhoods that qualify for the program. The company that operates The Mint dispensaries left similar flyers in Tempe bars, seeking people who have marijuana charges and would qualify to get the charges expunged and then apply for a dispensary license.

“The (multi-state operators) have already been scouting the streets with flyers, mailers and sending people door to door,” Rodriguez said.

DHS has proposed making the 26 licensees commit to helping the communities disproportionately affected by previous marijuana laws, and that commitment would remain with the licenses even if it’s transferred to another company. But some potential applicants like Rodriguez say the ownership and operations of the shops should always be with qualified applicants.

Because marijuana dispensary licenses are limited in Arizona and include the rights to grow and process marijuana products, they are worth upwards of $10 million.

The new lawsuit says that because the social-equity license winners can sell to other dispensaries, “the final rules promulgated by ADHS create what are functionally 26 ‘lottery tickets’ for qualifying individuals rather than a regime of continuing social equity ownership and operation.”

What the DHS rules require

The rules DHS developed require social-equity applicants to meet three of these four conditions:

Have had a household income less than four times the federal poverty level for three of the past five years. For 2021, the federal poverty guidelines for a family of four are $26,500, so the family could earn no more than $106,000 for an individual from the family to qualify.

Have a previous marijuana conviction for which they’ve been granted expungement, as allowed through Proposition 207, or a state or federal marijuana conviction. Either a copy of the expungement or conviction document is required.

Have a spouse, parent, child, sibling or guardian who was convicted of a marijuana crime.

Have lived for at least three of the past five years in a “community that has been disproportionately affected by the enforcement of Arizona’s previous marijuana laws,” which DHS defined as 87 ZIP codes with high rates of incarceration for marijuana crimes as well as social services.

Besides the straw-man concern, the plaintiffs also complain that the rules don’t set any social-equity rules for the businesses that often operate under a dispensary license, like marijuana farms and manufacturing sites that make marijuana edibles or concentrates.

The plaintiffs further argue that the rules don’t require the people operating the dispensary to meet the social-equity requirements, only the owners.

And they complain that the socialequity shops themselves are not required to locate in areas affected by previous marijuana laws.

The lawsuit also makes other complaints, including that people who might have lived in the ZIP codes identified by DHS as children but not in recent years don’t qualify for the ZIP code requirement.

“If you were brought up in a neighborhood as a teenager, caught a marijuana charge, and you moved out, that doesn’t mean you were not affected by that neighborhood,” Rodriguez said.

She said she would be glad to expand the number of people who could potentially apply through her lawsuit. And she said DHS should have rules that ensure any of the social-equity licenses that get revoked are put back out for qualified social-equity applicants and don’t just go away.

But the main concern is that existing dispensaries will eventually control the licenses because the winners are allowed to sell them.

“The final rules promulgated by the ADHS permit owners who qualify under the Social Equity Program to enter an agreement to sell or transfer their ownership interest in the licensed entity at any point after the license is allocated, which defeats the purpose of the Social Equity Program,” the complaint said.

Gary Smith, president of the Arizona Cannabis Bar Association, previously voiced concerns over the early drafts of the social-equity rules, but in a note to members Thursday, he noted the lawsuit’s ability to delay the licenses.

“This makes me think of that old Zen koan — What is the sound of a quarter billion dollars worth of licenses coming to a screeching halt?” Smith said of the lawsuit.