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A Silver Linings Playbook for New York’s CAURD Program

While New York cannabis consumers are feeling their oats in terms of having access to copious amounts of weed in the Big Apple and beyond, the situation for operators is far less rosy, to say the least. Applicants to the state’s adult-use program remain stuck in a court-imposed quagmire due to a preliminary injunction issued last month by Judge Kevin Bryant in Fiore et al v. NYCCB et al, the lawsuit by service-disabled veterans challenging the constitutionality of the CAURD program. The injunction not only stopped New York’s Conditional Adult-Use Retail Dispensary program in its tracks, but it also put existing and aspiring licensees in the program on notice that their CAURD licenses, if deemed unconstitutional, could be invalid and all but worthless.

In a notable compromise, Judge Bryant pushed back against the plaintiff’s wishes to include all CAURD applicants in the injunction and added in his order exemptions for applicants who had “met all requirements for licensing.” The order listed several factors necessary to be considered for exclusion and directed the state’s Office of Cannabis Management (OCM) to submit a list of eligible applicants to the court by a certain date. OCM submitted a list with 30 names on it prior to the August 25 court hearing in the case on, at which the court allowed 23 of the 30 listed applicants to be excluded from the injunction. Following several combative filings by both the plaintiffs and the defendants debating the eligibility of the exempted applicants, however, Judge Bryant last week rescinded his ruling lifting injunctions for the licensees and ordered the OCM to resubmit its list “on an applicant-by-applicant and requirement-by-requirement basis,” and also to certify under oath that “each of the included applicants have satisfied each licensing requirement.”

The judge had lost all trust in the claims made by OCM regarding any of the 30 listed licensees, and decided to cancel the exemptions until he receives information he can trust. But what does this mean for the hundreds of other applicants in various stages of the CAURD program, not to mention all of the other aspiring licensees? What happens if the CAURD program is deemed unconstitutional? How can such a complicated and expensive program start from scratch without causing irrevocable harm to people who were only doing what they were told to do by the state?

To try and get a handle on how this crazy situation may play out, Cannabis Business Executive spoke with Cole Schotz attorney, Robert M. DiPisa, who has been living this lawsuit along with his clients.

Robert M. DiPisa | Cole Schotz

“I’ve been to the hearings up in Ulster County Court,” he said. “I represent a CAURD license recipient, and when the TRO was put in place on August 7, we were probably a week away from signing our lease and had already incurred a lot of professional fees. We were about to commit to the lease where my clients would be personally guaranteeing that lease and would also start hiring contractors for the build out, so I guess the timing was good because we hadn’t already signed that lease.”

The TRO also gave them some breathing room. ‘We have been able to make some changes, because we’re uncertain as to how the litigation is going to end or what will happen with the CAURD licenses,” he added. “I’m assuming there’s going to be some method to transition the CAURD license holder into a more traditional dispensary license. I would be surprised if those who are operating under a CAURD license have to immediately shutter their doors once these licenses are deemed unconstitutional, and then have to reapply for a dispensary license. That just doesn’t make sense.”

Could DiPisa’s clients have qualified for an exemption? “No,” he said. “In order for them to make it on that list of 30, before August 7 they needed to have the signed lease, have submitted all documentation to transition from their provisional CAURD license to their actual CAURD license, and the OCM needed to have done the inspection.” There were other requirements they had not yet completed, he added, “But they were further along than a lot of people.”

DiPisa figured the list of exemptions was always going to be small. “I spoke with a couple of different people about it, because it’s like a snapshot of time, and there was only a small number of provisional licensees who were at this point,” he said. “The way I interpreted it was essentially the provisional licensee has signed their lease, construction is complete, they had submitted all documentation to the OCM but maybe the OEM hasn’t yet responded to say, ‘Okay, we authorize you to open up.’”

Were the requirements open to interpretation in any way? “I think it was open to interpretation,” said DiPisa, “but I don’t know how much wriggle room there was, because the way I interpreted that was, the provisional CAURD licensee has done everything they were supposed to do but maybe the OCM didn’t do what they were supposed to do, such as authorizing them to commence operations.”

The reason he found the 30 number plausible, he added, was because “at this point in time the OCM had a lot going on, and chances are there was a backlog of locations they needed to get final inspections on after construction was complete. It’s possible that 30 people were waiting in line. But it’s interesting, because you see the affidavits, and the affidavit from the OCM was like, ‘Yeah, most of them have met all the requirements, some have not completed construction.’

“And it’s unfortunate, because the affidavit wasn’t clear to the court as to who did and who did not [complete construction], so now everyone has to suffer,” he continued. “No one on that list is going to be an exception to the preliminary injunction until the OCM gets the documentation together and submits it to the court with specificity as to exactly where everyone was in the process. Which obviously is problematic, because now people on that list of 30 who did meet all the requirements have incurred costs, are potentially already paying rent as each day goes by, and they’re only losing more money. It’s delaying when they can open and operate, so it’s kind of unfortunate that we find ourselves in this spot.

“And listen, at the end of the day, it’s the plaintiff’s duty to keep that list as short as possible,” he added, “because the whole point is that the disabled veterans were supposed to be prioritized as well, and every CAURD licensee that is permitted to commence operations before them puts them in a worse position because they don’t have the opportunity to be first to market. So, the plaintiffs have an incentive to object to everyone on that list, to keep that list as small as possible, and to keep people off of that list.”

Has the court taken on a role here that it never wanted, where it’s now deciding who does and does not get a license? “You’re not the first person who’s asked me that question,” said DiPisa. “The court’s role is usually to interpret law, but I think that the court is put in an unfortunate position where they’re trying to weigh the harm, and what they’re trying to do is to offset the harm to the current licensees by picking out those who would be most harmed by the preliminary injunction and excluding them to continue on their path, because the harm to those individuals would most likely outweigh the harm to the plaintiff on not having the opportunity to apply and be prioritized.”

Going forward, how does the court get out of being the de facto regulator? “Well, the judge has said a couple times that he would welcome the OCM to just open up the application process to everyone because that would make the matter moot,” said DiPisa. “He hints at the idea of, why don’t you just open it up to everyone now, we would welcome something like that, and after the first hearing, the judge specifically said this is the opportunity for people to come together, for smart people with good ideas to resolve this matter. And the court gave time. Even though the order came out before the hearing, he scheduled the second hearing for two weeks after the first because he wanted to give the opportunity for them to potentially settle.

“Obviously, that has not occurred and doesn’t look like it will occur, so I guess the court’s role in this whole thing is specifically on creating the exclusions to the preliminary injunction,” he added. “I view them almost as the gatekeeper. They’re permitting those who have been most harmed to continue on their path and cross through the gate as a way to potentially offset the balancing of the harms, because those particular individuals would be harmed much more so than the plaintiffs in the event that they were subjected to the former junction.”

In this case, as the controller of the gate, is the court not also dependent upon information from the regulators in order to make their decisions? But because that information has been so tainted in their opinion, they’ve completely shuttered the gate.

“That’s exactly right,” replied DiPisa. “Their position is that none of this information is reliable, so until OCM provides the information that we need, no one no one gets through. And it looks like the only group that will be able to submit documentation directly to the court are the people who intervened as defendants. During the last hearing I believe the judge said they are able to submit documentation directly to the court. Everyone else has to go through the OCM.”

DiPisa is not succumbing to cynicism but keeps his optimism guarded. “We’re chugging along here,” he said of his New York cannabis clients. “I think the most significant question was, is the judge going to impose the preliminary injunction, and we know now that’s happening. And then there was excitement because there were going to be some exceptions, because the plaintiff asked that anyone not operating be exposed to the preliminary injunction, and the judge modified it a bit. When he imposed the preliminary junction, he said, ‘We’re going to create exceptions even though these people aren’t operating, because they’ve completed all the requirements.’

“And that got people excited,” he added. “They thought, ‘Maybe we can fit into this exception with more information.’ But now we’re seeing what’s happening, and I am concerned about how many others can be added to that list. It seems to be very monetarily focused: how much did you spend in reliance on the program? But I think as time goes on we’ll get a better benchmark as to who’s going to fall in and out of the exception once we see who has been included and who has been excluded.”

Beyond CAURD

I asked DiPisa what advice he is giving provisional CAURD licensees in light of the current impasse. “It depends on where they are in the process,” he said. “For the traditional dispensary licenses, the application process is supposed to be opening up in the fall. It’s not a situation where it’s going to be opening up in the spring, so you’re in a better position if you have already secured real estate and your landlord is willing to give you additional time for your contingency. A lot of these lease deals have a contingency that says, ‘If I don’t get my license from the OCM by this date, I am permitted to terminate the lease and get my deposit back, and it’s like this never happened.’ So, if the landlord is willing to work with you, and give you a couple extra months for that contingency, what do you have to lose? Worst case scenario, you get a little extra time to see if you are not included on the list, you reapply for your dispensary license, and you’ve already got your property.

“The problem is that once the dispensary licenses open up, you’re going to have a lot more competition from applicants trying to secure real estate,” he added. “When you have competition like that, you see prices start to tick up and properties become fewer and far between. But if you’re in a position where you’ve already locked up property and the landlord is giving you some additional time, and you’ve already spent money on negotiating the lease. I would say sign it and see how it goes. If things don’t work out, terminate the lease and go your separate ways, but don’t let go of what you’ve already worked for and what you have. It’s only going to become more competitive and more expensive.”

On the flip side, won’t landlords be sitting there thinking, ‘Wait a second, in a couple of months this place could be worth a lot more. Can we renegotiate?’

“If you haven’t signed yet, they can certainly try to retrade on price,” said DiPisa. “But once you sign the lease, they can’t retrade on that.”

Assuming they start the regular adult-use application process in early October, I asked, would people want to seek a three-month extension of a contract? “Under normal circumstances,” said DiPisa, “I do not rely on a date or a deadline that is given by a regulatory body as to when the application process will open up. As history has shown, they’ll say one date and there’s usually some kind of lag in timing that’s almost to be expected at this point. The difference here is all eyes, including the court’s, are on the OCM as to when they’re going to open up the rest of the applications, which gives me a little more confidence that it’s going to happen in October as opposed to if none of this was going on.”

And where else could the adult-use program go off the rails, because we can see the light at the end of the tunnel. “Normally, there could be some timing issues with the regulation being adopted, but there’s so much pressure on them, they have an incentive to get it done,” reiterated DiPisa. “A lot of times, there are also issues with the rollout, getting the process complete, getting the information out to the applicants, getting the portal to work. I’ve seen portals crash.”

Certain technical issues can and eventually will come up,” he added. “But the OCM has such an incentive to get it right and get it done on time, if there is any deviation on timing I don’t expect it to be months, but weeks if anything.”

Regulatory changes never end, I noted. “Correct,” responded DiPisa. “They keep tweaking. It’s like building a plane and flying it at the same time. But I don’t think you can just say it’s New York. To some extent, every single regulatory body in every single jurisdiction did not get it right, and a lot of the new regulatory bodies that are coming out in a different jurisdiction try to take this cafeteria approach, where they take the good parts of other jurisdictions and leave the bad parts that were unsuccessful. I don’t think anyone has really gotten it right yet, and I do believe, unfortunately, that these regulatory bodies are very good at grasping defeat from the jaws of victory. It seems like they’re so close and they got it so right, but yet something like this happens.

“Even something as simple as the CAURD program, where there was no authority for it whatsoever in the MRTA. It was a brand-new license class that wasn’t in Article 4, which was very clear that all applications were supposed to be released at the same time, and that they were supposed to prioritize certain classes but not exclude others. They certainly could have created the same effect by releasing the applications at the same time, giving justice-involved, minority owned, disabled-veterans, and stressed farmers first priority review so their applications are reviewed and approved first. That could have created the same effect; they would have been first to market, and they could have also done it with scoring methodology, giving them a significant number of points just for qualifying. I think the priority review and the distribution of licenses to these groups probably would have been a better method because then you get the licenses in their hands first, and they would most likely be first to open and first to market. You create the same thing as opposed to one license class that excludes everyone. It never works out well when you create a licensing program that excludes. You’re usually in a better shape when you prioritize.”

Did he believe the CAURD program will be found unconstitutional, and will the result be having to start from scratch? “I believe the plaintiffs have a stronger argument,” he stated unequivocally. “I think the defense tried to create the authority for the CAURD program in piecemeal, and it’s just not a strong enough argument. I think ultimately if it is deemed unconstitutional and the plaintiffs win, I don’t think it makes sense to have the CAURD operators shut their doors because their licenses were deemed unconstitutional and no longer valid, and then they have to reapply.

“What I think makes more sense – and I’m just looking at this practically – is if they’re deemed unconstitutional, that there is a method whereby upon this date your CAURD license is no longer valid,” he added. “Instead, there is a pathway for you to transition your CAURD license into a traditional license within a period of time, and prior to the date at which your CAURD license is deemed invalid, you need to complete X, Y, and Z steps, which are the requirements of a regular dispensary license. Upon completion of those steps, you submit everything, and the OCM will transition your CAURD license into a traditional dispensary license, and you need to do all that before a date certain when the CAURD licenses are no longer valid. That makes sense to me, but will they do it? I don’t know, but I think that if some kind of process like that was imposed, some kind of pathway to transition for CAURD operators or those that hold the preliminary injunction, that makes sense to me.”

When he asked, ‘But will they do that,” was the ‘they’ he was referring to OCM or the court?

“That’s the million-dollar question,” he replied, “because on the date that the court deems the CAURD program unconstitutional, arguably those licenses would no longer be valid. So, the question is, does the OCM need to act prophylactically to protect these CAURD license operators ahead of time?”

Instead of defending this case, shouldn’t they be creating those pathways? “Yes,” said DiPisa, “but those pathways can be put into effect after regulations are adopted and the application process and requirements are put out, because to create that pathway we need to know what these requirements are for a traditional dispensary license in order to see what the differential is and what the CAURD licensees need to do to qualify to transition to a dispensary license. But yes, it’s something that the OCM should be looking at now.”

When put it that way, it sounds like OCM has a lot on its plate with not a lot of time to work with, and progress seems difficult because they’ve constrained themselves within their own timeline. “It’s difficult and it can be frustrating to watch as this rolls out, especially when you live it with your clients every day,” said DiPisa. “You don’t want to see your clients take it on the chin when these things happen, because ultimately the ones who incur costs and suffering are the applicants.”

Tom HymesTom Hymes

Tom Hymes

Tom Hymes, CBE Senior Editor, is a Los Angeles-based writer and editor with over 20 years’ experience covering highly regulated industries. He was born and raised in New York City. He can be reached at [email protected].

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