Cannabis Licensing at Issue as Adult-Use Vote Looms

David Couch, author of Arkansas’ medical marijuana amendment.

As Arkansans face a possible November vote on legalizing recreational marijuana — a proposal that would enshrine existing medicinal cannabis licensees in a much bigger market — the state Supreme Court has cast heavy legal shade over the system that handed out those licenses in the first place.

Two Arkansas Supreme Court rulings this month on disputed licenses relied in part on a case that forced the state to grant a cultivation license to an initially rejected company, Carpenter Farms of Grady. The company, now completing its cultivation site in Lincoln County, sued the state in 2018, saying its rejection over paperwork problems was arbitrary and unfair.

In a June 2 opinion, the justices dismissed a claim by a Carroll County company, doing business as Eureka Green, that its dispensary license application was unfairly rejected. But a scathing dissent by Justice Courtney Rae Hudson, who also cited the Carpenter case, lambasted the state for failing to create adequate licensing procedures. The case resulted in a state pledge to make new rules and revamp the licensing process.

“The rules mentioned in the Supreme Court opinion are being promulgated and remain a top priority for this year,” state spokesman Scott Hardin told Arkansas Business. The state’s Medical Marijuana Commission operates out of the Department of Finance & Administration, and its Alcoholic Beverage Control Board enforces marijuana regulations. “ABC authorized the company [Carpenter Farms] to begin growing in certain portions of its facility earlier this year,” Hardin said.

Opening Path to License

On June 16,  the high court opened a legal path to licensing for another rejected applicant, 2600 Holdings LLC of Little Rock, doing business as Southern Roots Cultivation. The justices rejected Southern Roots’ bid for a declaratory judgment against the state, citing Arkansas’ sovereign immunity from liability. But they also ruled that the company can seek an order in district court to give it the cultivation license that went to a competitor, River Valley Relief Cultivation of Fort Smith, led by hotel chain owner Storm Nolan.

Southern Roots had argued that Nolan disbanded his company and that it was a defunct entity when granted its license. That claim was the centerpiece of a front-page examination of marijuana licensing fairness in Arkansas Business in May 2021.

The Supreme Court ruling cleared Southern Roots to seek a writ of mandamus to declare it a licensed cultivator. It argued it was the next highest-scoring applicant in line for a cultivation license after the commission added three new growers to the initial system of five. The court remanded the case to Pulaski County Circuit Judge Herbert Wright.

“Oh, if I had it to do over again, I would have had all the licenses granted by lottery and avoided this mess,” said Little Rock lawyer David Couch, author of the 2016 constitutional amendment that won over 53% of Arkansas voters and legalized medical marijuana. “At least everyone would have an equal chance under a lottery.”

The Recreational Campaign

Meanwhile, former state lawmaker Eddie Armstrong is leading Responsible Growth Arkansas, an industry-led effort to get enough signatures to put recreational marijuana on the ballot for November. The campaign, funded mainly by the original five medicinal cultivators, has put $1.8 million into its mission of gathering about 90,000 signatures of valid Arkansas voters by a July 8 deadline. “The signature campaign is going well, at about 90,000 names so far,” Armstrong said Wednesday, adding that the group wants a comfortable cushion because some names will inevitably be invalid. “Over the last month, we’ve exceeded our projections, and we’re very confident we’ll be able to get on the ballot.” Two competing efforts have faded, and both are pointing toward 2024 for a second chance.

The Responsible Growth amendment would direct the ABC to simply grant adult-use cultivation and dispensary licenses to the companies that already have medicinal licenses, then expand, by lottery, the number of adult-use dispensaries to 120 and cultivation sites to 20 statewide. Arkansas now has 40 dispensary licenses and eight licensed cultivators.

“The rich get richer,” said Couch, who instead supported a plan by Melissa Fults of Arkansas NORML. Now Fults is aiming her effort at 2024 and urging supporters to reject the Responsible Growth proposal. A third initiative, by a group called True Grass Arkansas, planned to decide this month on whether to suspend its signature-gathering. The True Grass amendment would provide licenses to all growers and sellers who apply; Fults’ proposal, the Arkansas Adult Use and Expungement Marijuana Amendment, would allot licenses by lottery.

Couch called Armstrong’s initiative a giveaway to existing cannabis companies. “Hell, the cultivators are guaranteed cultivation licenses and each dispensary owner gets another dispensary license,” he said. “The plan also eliminates the medical marijuana rule that every dispensary and cultivator be owned at least 60% by Arkansans. And with all this, there’s no provision to give forgiveness to past marijuana-related offenses, as other proposals would do. It doesn’t make sense to still punish people for a crime that will now be legal.”

Responsible Growth Arkansas hired Advanced Micro Targeting Inc. of Dallas to manage the signature campaign, paying it $300,000, according to financial reports filed with the Arkansas Ethics Commission. 

State ‘Not Above the Law’

Lawyers for several Arkansas marijuana enterprises were closely watching the Southern Roots case, particularly to see if it might offer their clients a legal recourse to licenses.

Abtin Mehdizadegan of Cross Gunter Witherspoon & Galchus in Little Rock, one of the attorneys for Southern Roots, told Arkansas Business that by allowing the writ of mandamus action to proceed, the decision confirmed that the state “is not above the law or the Constitution.”

All parties, including Southern Roots, should get their day in court, he said. “The original Medical Marijuana Commission committed a clear violation of Amendment 98 to the Arkansas Constitution. Rather than issuing the final cultivation license to the next qualified applicant, Southern Roots, it issued the license to an entity that did not exist.”

He said the ABC has ignored its responsibilities and “has continually refused to revoke the unconstitutionally awarded license.” 

“The state attempted to avoid accountability under the cloak of sovereign immunity,” Mehdizadegan said. “The Supreme Court rejected that attempt, and unless this matter reaches an amicable, just resolution out of court, we will continue our zealous pursuit of justice before Judge Herb Wright.”

Amanda Priest, a spokesman for Attorney General Leslie Rutledge, said Rutledge was “reviewing the decision and will work with the clients to determine the next step.” Nolan, the primary owner of River Valley Relief Cultivation, which is now raising medical marijuana at a facility near the Fort Smith Airport, had no comment on the high court ruling.

Justice Hudson has emerged as one of the Supreme Court’s most vocal critics of the state marijuana licensing process. Her dissent in the Eureka Green case mentioned “one appeal after another that highlights the MMC’s shortcomings,” reminding colleagues that in a 2018 case known as Naturalis, “the attorney general advised us that a commissioner had been offered a bribe, that he did not report it, and that there were other as-yet unsubstantiated allegations of improprieties in the scoring of cultivation licenses.”

She also emphasized the importance of fairness in divvying up the potentially huge recreational marijuana market. “Undoubtedly, medical marijuana is big business in our state, and recreational marijuana may be in the offing.”

The Responsible Growth initiative would add a 10% tax on recreational sales on top of the regular state sales tax, with proceeds going for law enforcement, 15%; the University of Arkansas, 10%;  and drug court programs, 5%. After covering administrative costs, the rest would go into the state’s general fund.

The amendment would also end taxation on medicinal marijuana sales.

Some experts expect recreational sales to approach a billion dollars a year.

Medicinal cannabis sales hit nearly $265 million in 2021, Hudson wrote. “Those sales are subject to heavy taxation that generates substantial tax revenue. By neglecting its duty to adopt adequate rules, the MMC is abdicating its duty to properly regulate this exploding industry.”