Lawsuit exposes Nevada’s sketchy cannabis licensing practices
Nevada stepped into the adult-use cannabis era with the best of intentions. The state set up its regulatory system and licensing process with a promise of level playing fields, honest application scoring, and full transparency.
Strange scoring, chummy meals, and goalpost movement. What's going on in Nevada?
Things haven’t worked out exactly as planned. Evidence presented in an ongoing lawsuit has raised a number of questions about scoring procedures, equity fairness, and the possible role of undue influence in the awarding of the state’s extremely lucrative retail cannabis licenses.
Recent rulings in that lawsuit have left the state’s cannabis industry in a mild state of confusion, as nobody’s sure who exactly has legal permission to open new stores this autumn, and who does not.
$10 million licenses at stake
The Silver State is one of just five adult-use cannabis states to limit dispensary licenses. Ballot Question 2, the adult-use legalization measure approved by Nevada voters in 2016, allows for about 130 retail cannabis stores to open by the end of 2020, based on the state’s current population.
There are already 66 stores open statewide. That means the state could legally issue up to 64 more store licenses through the end of next year. Local officials in 12 of Nevada’s 16 counties, though, have prohibited cannabis retail stores. (All 12 counties are sparsely populated rural areas.) So realistically, there are about 42 new retail licenses up for grabs between now and the end of 2020.
The recent sale of existing licenses suggest each is worth at least $10 million. That’s due in part to an imbalance in the market.
Ballot Question 2 set the number of statewide licenses based on residential population. But the actual market size in Nevada is wildly skewed by the massive tourist traffic in Las Vegas. The state’s population is 3 million. Las Vegas hosts 43 million visitors every year. You’ve got a licensing scheme set up to serve 3 million. It’s actually serving 46 million. Hence the top-dollar value of a retail license.
When that much money is at stake, the rules of fair play face a lot of pressure from companies willing to bend them.
Winners chosen in Dec. 2018
The state’s second round of retail cannabis applications were considered by officials at the Department of Taxation—Nevada’s cannabis regulator—last year, and the licenses were awarded in December.
More than half of the state's new dispensary licenses were given to just 3% of the applicants.
Predictably, executives at companies that did not win licenses were outraged. But so were a number of others in the cannabis industry. Something about the process didn’t sit right.
The recreational-only licenses were said to be open to any operators of marijuana cultivation or production facilities, or existing retail license holders. In the end, licenses were awarded to only 17 of the 127 companies that applied, accounting for 61 of 462 total applications. (Some companies were awarded licenses for more than one retail location.) Four of the 17 companies—Essence, The Source, Zenleaf and Grassroots—received a combined 33 of the 61 licenses, meaning more than half of the new dispensary licenses for the entire state were given to just three percent of applicants.
At the time, Department of Taxation officials were required to protect the identity of the license winners. That only added fuel to the fire, as it offered no transparency about how the applications were scored, or which companies scored the highest and why. Eventually, word leaked out. Official announcements came from some license winners. That, combined with industry chatter, allowed many to put the pieces together.
Many of the 17 license winners seemed to have close connections to the Nevada Dispensary Association, the cannabis-store advocacy group.
Those pieces added up to a troubling picture. Many of the 17 license winners seemed to have close connections to the Nevada Dispensary Association, the state’s cannabis-store advocacy organization, and had commissioned the help of Las Vegas business attorney Amanda Connor.
All those questions led to a lawsuit. A coalition of 11 cannabis business owners who were not awarded licenses in the latest round filed suit against the Department of Taxation, claiming that agency officials altered their rules on the fly to accommodate a select group of applicants.
Maybe it’s just lunch
The evidence that’s emerged from that lawsuit has raised a number of questions about the agency’s process.
In June, Nevada Department of Taxation Deputy Executive Director Jorge Pupo testified that he had shared multiple meals with Connor, Nevada’s most well-known cannabis business attorney, in the weeks before her clients were awarded licenses. The two also exchanged texts frequently on their personal cell phones. Pupo testified that he often dined with industry executives and attorneys, sometimes picking up the tab himself.
In court, Pupo testified that Connor never asked him about changing anything to do with the selection process.
“We were conducting business,” Pupo said. “Aside from the application process, the rest of the business doesn’t stop. You can’t stop talking to everyone.”
Lawyers for the state said Pupo couldn’t be influenced because applicant evaluations were done by contracted temporary workers. Pupo also testified that he didn’t check score results.
Neither Connor nor Pupo responded to a request for comment from Leafly, but a Department of Taxation spokesman said such interaction on the surface does not run afoul of any state regulations.
Changing rules in mid-process
In late August, Clark County District Judge Elizabeth Gonzalez made her first significant ruling in the case. On Aug. 23, Gonzalez found that the Department of Taxation acted beyond its legal authority by scrapping a slew of rules last fall—including mandatory background checks for prospective owners—when scoring more than 460 applications competing for the latest round of dispensary licenses.
The Department of Taxation also allowed personal relationships between business owners and its officials to affect which companies were awarded the licenses, the judge said.
“The failure of DoT to carry out the mandatory provisions of [Nevada’s marijuana laws] is fatal to the application process” Gonzalez said in her 24-page injunction.
Who’s clear to open?
The ruling threatened to bring the second phase of Nevada’s retail cannabis expansion to a grinding halt. But then six days later, Judge Gonzalez ruled that license winners whose ownership underwent proper background checks from the tax department would not be blocked by her injunction.
The number of new dispensaries affected still isn’t clear. A Department of Taxation spokesperson said up to three dozen new stores could open their doors by the end of October 2019, while plaintiffs’ attorneys said only 12 new stores would be eligible.
Gov. Sisolak gets involved
The backlash over the licensing process caught the attention of first-year Nevada Gov. Steve Sisolak, who worked with the Democrat-controlled legislature and Department of Taxation Director Melanie Young to pass a bill in this year’s lawmaking session to make the results of cannabis licensing process available on the department’s website. Sisolak in May called the transparency law a step toward cannabis in Nevada becoming “the gold standard in the nation.”
But by late August, Sisolak felt compelled to respond to Judge Gonzalez’s injunction, saying in a statement the recent hiccups were a result of policies before he took office.
“At the start of the Governor’s first term, he announced a complete overhaul of the marijuana regulatory system,” Sisolak’s office said.
Pattern of winners
Former State Sen. Tick Segerblom, now a Clark County Commissioner, spearheaded marijuana legislation in Nevada from 2013 to 2017. Known as the “Godfather” of cannabis in the Silver State, Segerblom, a Democrat from Las Vegas, is credited with making both medical and recreational cannabis a legal reality for Nevadans.
'There’s money to be made in marijuana and we want it to be equitable for everyone.'
When the first batch of medical licenses were issued back in 2015 and again when the first recreational licenses were doled out in 2017, Segerblom and other officials saw one pattern among the glut of attorneys, entrepreneurs, real estate moguls and business executives receiving them: they were nearly all white men. Segerblom, with the help of then-Assemblyman Nelson Araujo, pushed through a bill in the 2017 legislative session to give an ambiguously defined preference for future marijuana licenses to minority applicants.
“There’s money to be made in marijuana and we want it to be equitable for everyone.” Segerblom said. “We want to encourage women and people of color to become pot entrepreneurs, too.”
Diversity scores questioned
For the most recent round of applications, The Nevada Department of Taxation awarded up to 20 of 250 possible points to companies with ethnic diversity among its “owners, officers and board members.”
But of the 17 companies to receive the 61 licenses, none have primarily non-white male ownership. The contradiction led plaintiffs to accuse the license winners—most of whom scored high on diversity—of assembling phony board and executive positions filled with women and minorities for the sake of earning extra points on the application.
Gonzalez, the Clark County judge, found that claim credible and her injunction said the Department of Taxation’s classification of diversity “created a process which was partial and subject to manipulation by applicants.”
Using temps as scorekeepers
The judge’s ruling that six temporary workers contracted from Manpower staffing agency to score the applications were not adequately trained by the taxation department also discredits the process, plaintiffs say.
Frank Hawkins, a former NFL running back who owns Nevada Wellness Center Dispensary in Las Vegas, was among longtime Las Vegas dispensary owners not to score a new license. Hawkins, who is African American, applied for four licenses, only to finish toward the bottom of the pack, some 70 points below the winning scores.
Hawkins noted that Pupo, the DoT deputy executive director, also altered a requirement for licensees to submit building and location plans for their proposed dispensaries. Instead, Pupo mandated only floor plans. In the ruling, Gonzalez said the building-to-floor-plan swap also went against Ballot Question 2, and was revealed “selectively” to some applicants, but not to others.
“There’s compelling evidence the state erred many times,” Hawkins said. “The process should be thrown out and they should have to do it again.”
Reno store now on hold
Andrew Jolley, founder of The Source who sold his dispensary chain to Toronto-based Green Growth Brands last year for cash and a stock package valued at over $70 million, argued the licensing process did, in fact, provide a level playing field. Jolley, who despite the sale played a leading role in acquiring seven new dispensary licenses for The Source, noted applications were scored blindly, and each was graded on the same criteria. Most license winners simply put together stronger business plans and followed directions better than those who missed out, he said.
“There’s a lot of outrage and noise to undermine the credibility of the (tax) department,” Jolley said. “We worked hard on our application for months and did a great job at it. Unfortunately, this negative climate is just the state of affairs right now in our industry.”
The Source was on the brink of using one of the new licenses to open a new dispensary in Reno last month. The injunction, which caused the Reno City Council not to issue the dispensary a local license, has shelved the company’s plans.
Only four of the 17 companies that won some two dozen combined licenses are affected by last month’s injunction, per the Department of Taxation. Additional background checks must be conducted on company owners and board members before those companies can move forward.
Most of the 11 companies listed as plaintiffs, and several more not directly involved in the lawsuit, are hoping last month’s injunction eventually leads to a complete recall of the recently issued licenses. Others are impartial to whether the original winners keep the awarded licenses, as long as their companies also score a license. A third group of business owners that missed out on the licenses are only seeking a cash settlement. Representatives for both the plaintiffs and Department of Taxation said they expect the licensing snag to go to eventually go to trial.
Gonzalez will next address the injunction on Sep. 9.
The Associated Press contributed to this report.