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Lessons Learned From the First Phase of Pennsylvania’s Marijuana Program

With the dust settling and fuzzy math shrieks abating, Pennsylvania’s medical ­marijuana program’s first phase has drawn to a close.

Or has it?

Denying 408 applications and demanding its 12 grower/processor and 27 dispensary licensees construct statutorily compliant facilities within 182 days, the program’s ­overseeing agency, Pennsylvania’s Department of Health (DOH), faces Herculean obstacles in overcoming the missteps which crippled New York, Maryland and New Jersey’s programs and ­mollifying scores of disgruntled and litigious applicants.

Medical marijuana program

Defined by the Medical Marijuana Act, 35 P.S. Sections 10231.101-10231.2110, regulations promulgated there under, and Medical Marijuana Organization (MMO) permit application (hereafter, collectively referred to as the marijuana law), the program encompasses 17 serious medical conditions eligible for marijuana prescription, including post-traumatic stress disorder.

Authorizing 25 grow/processing licenses and 50 dispensary licenses, each empowering the licensee to open three locations for up to 150 dispensaries, one trade publication estimated that if even less than 1 percent of the Commonwealth’s 12.8 million residents participate, the program would be populated by over 100,000 card holders generating $100-$150 million in annual sales revenue.

Dividing Pennsylvania into six delineated geographic regions, the DOH launched a competitive, “1,000-point scoring ­system” based on factors including the respective region’s population, number of serious medical condition-suffering patients, ­serious medical conditions types, public transportation access, and rural- and ­urban-area health needs.

Because applicants compete inter-regionally, a winning Region 6 score may fall short of that which ­prevailed in Region 1.

Requiring that each MMO’s application provide a diversity plan defined as a strategy promoting or ensuring diverse groups’ participation in an MMO’s ownership, management and operation through contracting and employment opportunities, the ­program’s scoring rubric apprised that 100 potential points would be awarded for diversity and community impact, respectively. Further, unlike Alaska, Colorado and Washington state’s programs’ launch, the program imposed no residency requirement, removing any ­barriers to entry for out-of-state interests.

Electing to award licenses in phases, on June 20, the DOH awarded 12 grower/processor, and, on June 26, 27 ­dispensary licenses, forming the ­program’s first phase.

Lessons learned from the first phase

Ignoring the ­program’s primary objective of swiftly providing sick people with medicine, the first phase license ­denials and awards triggered a tidal wave of malevolence to wash across Pennsylvania.

Seduced by their own PowerPoint deck’s glitter, both high and mighty and hardscrabble applicants received a rude awakening in the form of both denied ­applications and modest scoring. Stunned by their lack of sway and convinced that shenanigans prevented fair consideration, lawsuits ranging from “striking Pennsylvania marijuana law as unconstitutional” to “disqualifying ­successful applicants for alleged wrongdoing in other jurisdictions” are being loudly threatened across all 67 counties.

Although the program allows each ­applicant to receive a de-briefing on how respective applications were scored, and for unsuccessful applicants to appeal their scoring, here is what the first phase results revealed:

• Life ain’t fair. Mirroring Arizona’s 2016 dispensary permit results (in which 750 applicants sought 31 licenses), each program application had less than 1 in 11 chance of winning. Further, because the program omits any residency requirement, Pennsylvanians, whom had never grown, processed or sold marijuana, had even less of a chance.

• Big marijuana carried the day. Approximately 70 percent of the winning applicants were affiliated with growers, processors and dispensaries already operating in multiple legalized marijuana ­jurisdictions. Beyond being able to demonstrate a history of being a transparent, compliant and profitable marijuana-related business, winning applications were crafted by experts at submitting winning applications, which is distinct from growing, ­processing and selling marijuana.

• Consultant means failed grower. Like a rube swindled by a suddenly exiting town carny, seemingly sophisticated Pennsylvanians got suckered by consultants with shiny trade show booths leveraging claims of “Colorado or California growing experience” and selling fanciful and ­proprietary lighting, fertilizing and yield optimization techniques. Also, enjoying handsome windfalls at 400 unsuccessful applicants’ expense were lobbyist and juiced-in lawyers offering connectivity to politicos with jazzy titles and zero decision-making process impact.

• Follow the rules closely. Does your diversity definition encompass armed forces veterans or involve third-party certification? Regardless, because Pennsylvania’s marijuana law defines a diverse group as a certified disadvantaged, minority-owned, women-owned, service-disabled veteran-owned or veteran-owned small business, the program’s unique criteria disqualified many seemingly qualified applicants.

• Pennsylvania’s Program Is Built to Last. Perceived inequities aside, the DOH and the program got it right. Beyond meeting every self-set deadline and blitzing through 500 applications in 90 days, licenses were generally awarded to the best-funded ­applicants with proven track records of success. In an exceedingly volatile industry hinging upon timing, adequacy of ­funding, and fullness of regulatory compliance, in the first phase the DOH has positioned the program for its greatest ­likelihood of swift success.

With 39 licensees scrambling to raise capital and timely complete compliant ­facility construction, and 400 failed applicants licking their wounds and weighing their options, one thing is clear: The remaining 13 grow/processing and 23 dispensary licenses will soon be up for grabs and the level of competition will be even fiercer than what occurred in the first phase.

Steven Schain

Steven Schain

2019 National Law Journal “Finance, Banking, & Capital Markets Trailblazer” award winner, Steve Schain is Senior Counsel at Smart-Counsel, LLC, a 100% female owned boutique Cannabis law firm.  Steve represents entities, governments and individuals in litigation, regulation and compliance, financial services, license applications and entity formation. Reach Steve at [email protected]

This Post Has One Comment
  1. Your comments are right on target and touch on a lot of the issues facing regulators as well as those seeking to get past them and into the business. And the commentary about “consultants” and the money they are making (taking) from people trying to get into this highly volatile industry are very important.

    As someone who helps people in the cannabis industry access the legal use of credit cards, and who receives only a portion of what the card company charges rather than a consulting fee from the user, I find the number of people printing up business cards including the word “consultant” more than a little disconcerting.
    And, sadly, many of the people we talk to have stories of working with people who said they could get them legal credit card access who could, in fact, do nothing of the kind. There are all kinds of debt cart and ATM options, but none of them are legitimate credit cards from actual banks, so, I have to claw through miles of defensiveness and skepticism before I can get people to look at what we offer – which, BTW, is FinCEN-certified and approved by the US Treasury and allows the acceptance of credit cards from customers and the payment of suppliers and others with credit cards as well – dramatically reducing the need for burying cash in the desert.
    Thanks for offering such a clear-eyed view of how things are going in Pennsylvania. Here’s hoping other states are reading these articles before they start their own processes.

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