Attorneys for rejected marijuana applicants recap arguments against licensing process as case draws to a close
Lawyers began to rest their cases Thursday after a three-month-long trial in a marijuana licensing dispute between the Nevada Department of Taxation and almost a dozen companies that did not receive dispensary licenses last December.
Four plaintiffs attorneys made their closing arguments Thursday morning, repeating many of the points that have reverberated throughout the case.
Clark County District Court Judge Elizabeth Gonzalez said her ruling would be based on whether the department exceeded the scope of its powers and if the state acted arbitrarily and capriciously in implementing a voter-approved ballot question legalizing recreational marijuana. She will also be looking at how ownership diversity and dispensary floor plans factored into application scores.
Plaintiffs attorneys want the court to issue an injunction, preventing the state from allowing companies awarded conditional licenses to begin operations.
“That would be to conclude them from conducting the final inspection, the final step, for permitting these conditional licenses to go into operation,” said attorney Dominic Gentile, representing companies suing the state. “It’s pretty clear that these licenses are rare.”
Out of a pool of 461 applications, 61 conditional licenses were awarded to 17 cannabis businesses.
The state will defend its case in the second part of closing arguments scheduled for Friday morning. Gonzalez will then issue a ruling, although it is unclear whether that will occur Friday.
The stakes for the case are high. Taxable marijuana sales in 2018 topped a half-billion dollars. The state collected almost $70 million in revenue from marijuana wholesale and excise taxes during the first year of legal sales.
The primary plaintiffs’ arguments
Illegal Sales to Minors: Gentile is representing entities that were already in the medical and retail marijuana business and unsuccessfully sought additional dispensary licenses last year. He said his clients were deprived of due process and that the state failed to comply with its own rules.
“There's testimony in the record that anybody who wants it and is over 21 can get it, and apparently people under 21 can get it," Gentile said.
He referenced the 2016 ballot question that required the prevention and diversion of marijuana for those under 21 years of age. Department of Taxation Deputy Executive Director Jorge Pupo testified that he directed employee Karalin Cronkhite to withdraw the investigation of three illegal sales of marijuana to minors after company officials self-reported the issue to the state. At least one of the sales came from the company The+Source, which was awarded 11 licenses in the last round of licensing.
“We don’t know how young. We don’t know the circumstances. We don’t know if anyone was prosecuted,” said Gentile. “We do know that it was never brought to the attention of any law enforcement agency, including the attorney general, who certainly is the counsel for the Department of Taxation and also the chief law enforcement officer in the state.”
The illegal sales were a prominent point brought up by several of the plaintiffs attorneys in closing statements.
“A crime was committed. They admitted it, and they [attempted] to suppress it,” said Gentile. “I suggest compliance was an important part of this, and it was not received.”
Relationships between applicants and state employees: Attorneys frequently referenced the relationship between Pupo and Amanda Connor, an attorney who, according to plaintiffs attorneys, was paid about $150,000 to represent each applicant.
“I don't think there is any question that Amanda Connor was the most successful lawyer in terms of obtaining licenses for her clients,” Gentile said.
In testimony, Pupo said he went to multiple lunches and dinners with Connor, and also spoke with her over the phone and through email.
Plaintiffs attorney Theodore Parker pointed to an email conversation between Connor and Pupo in which he tells her proposed dispensary locations would not be graded in the application.
“This is inside information given to Amanda Connor that materially benefited the intervenors that she represented,” said Parker. “I can tell you on behalf of Nevada Wellness Center, it had no such access. It had no such information, and a majority of the plaintiffs didn’t.”
Parker said that people such as Connor and other successful applicants including Andrew Jolley of The+Source had access to the Department of Taxation staff, including Pupo, Cronkhite and Gilbert. He said his client, as well as other plaintiffs, did not have that access because they didn’t have personal relationships with the department’s representatives.
“Nor should they [have] had to,” Parker said. “This process shouldn’t be based upon relationships. It shouldn’t be based upon favoritism. It shouldn’t be based upon who you know. It doesn’t say that in the ballot question. It shouldn’t be based on how rich you are or how fair-skinned you are.”
The diversity issue: Not all plaintiffs attorneys agreed on the fact that diversity was a scored portion of the application based on differing definitions of the term. Plaintiffs attorneys did agree the scoring was done unfairly.
“[How diversity was scored] is absolutely diametrically opposed to diversity,” said Gentile. “The reason we care about diversity in our society is because some people [have a] glass ceiling. Racial and ethnic minorities have been thwarted in their ability to financially succeed for a couple hundred years. So, to value somebody who is a rich, white guy and give them points for being that, how can that even come close to being directly and demonstrably related?”
He added, “It can’t.”
Originally, he said, the idea was to use diversity as a tie-breaker.
“Absolutely legitimate,” he said, but added that’s not what happened.
“Here’s what happened here: The rich white guys went out and rented minorities, and created boards that are phony boards and placed women and people of color on those boards and got points for it,” Gentile said.
Parker said he does think diversity should have been graded in the application because he believes it's important to encourage diversity in the legal marijuana business.
But he agrees with Gentile that the process was not used as intended.
Location and community: According to plaintiffs attorneys, the state was not clear on requirements in the location portion of the application.
“Even [Amanda Connor] was confused in regards to the means of listing a location,” said Gentile, referencing an email between Pupo and Connor.
He also said that there were two versions of the application, and there were changes made to the location portion from one version to the next. State attorneys said earlier in court proceedings that location did not have to be listed. Rather, applicants were scored on floor plans and what was in them.
“There’s no way to address a couple of parts on that application without knowing the location,” said Gentile, noting that building construction was listed as being worth 20 points in the scoring system. “I don’t know how you can make a determination of building structure without a location.”
He continued his point by addressing two portions of the application: quality safe-keeping and impact on the community. Both, Gentile said, could not be graded without a listed location.
“There is simply no way to determine the impact on the community without knowing the location of the proposed store,” said Gentile. “You cannot determine the impact on a community by a UPS mail drop.”
Complying with ballot question language: In the ballot question, background checks were listed as a requirement for each prospective owner, officer and board member for a marijuana establishment license applicant.
“My best guess is that it was the very people in this room, both sides of the room, that didn’t want to have to spend the money,” said Gentile. “It was the industry that probably cajoled the regulators to back off of the clear mandate.”
Gentile singled out Green Thumb Industries, which now owns Essence, a company that won eight licenses, and said it found a workaround for this provision.
Essence was not publicly traded when it filed its application. Yet, during the application process, GTI, a publicly traded company, bought Essence.
“It is so inconvenient to background check every owner of a publicly traded company when you can’t change that but you can wait until you sell into a publicly traded company,” said Gentile.
He said this is because the regulation has always been that with any transfer of ownership, no one had to be investigated unless they had an ownership stake of 5 percent or more. That deviates from the ballot question, which called for background checks for all owners and board members.
“We have testimonies from Mr. Gilbert, Mrs. Cronkhite and Mr. Pupo that compliance wasn’t scored or considered,” said Gentile.
Experience of evaluators and failure to analyze further: Plaintiffs attorney Parker said there were several mistakes made as evaluators were reviewing his client’s application, including miscalculating the score in terms of location, community impact, education criteria and compliance.
The state used staffing agency Manpower to grade applications. State employee Cronkhite said she helped train the temporary workers.
Parker argued that some things were lost in translation, based on the errors he saw. Those errors included not accounting for the education of the owners on staff and missing accounts of appliances listed in the application of his client, Nevada Wellness Center.
“Those are the type of mistakes quality control and quality assurance could have caught,” Parker said.
He referenced his client’s attempt to meet with the state to discuss his applications that were rejected.
“The state further guarded and shrouded in secrecy this process by refusing any administrative rights or remedies, including appeal,” he said.
Parker concluded that when he was finally able to receive the evaluators’ notes, he found repeated mistakes in the scoring process. He also referred to previous testimony, in which different employees of the state could not recall specific actions made in their department.
He said it was the responsibility of the state to have better regulated the process.
“Mr. Pupo acknowledged and conceded that things should have been done differently,” Parker said.
In defense, a ‘sore loser’ argument: The last attorney to present was attorney Adam Bult, who said that the state has broad authority but needs to be fair.
“The state is afforded deference but when the state admits it refused to marry the initiative with the regulation of the state, that is arbitrary and capricious,” he said. “The state is afforded deference but what it isn’t allowed to do is withhold information on how that process was handled. The state is afforded deference but what it isn’t allowed to do is pass the entirety of the grading process to Manpower.”
Bolt also challenged earlier testimony from defendants, who declared that those who did not win conditional licenses were “sore losers,” and that those denied licenses could not prove they would have scored better if the application was evaluated differently.
He said that in some instances, applicants showed that with a few scoring changes to a particular section, scores would have been different. For others, he said, there was not a chance to even see because of the lack of a baseline and a major lack of transparency in the licensing process until this spring.
“When you can’t get information on how it was graded, when you can’t have robust and meaningful conversations with scoring interviewers in January, you’re out of information,” said Bolt. “So it takes 10 lawsuits, a legislative session, a new administration [and] an Assembly bill to get what we should have had.”
He added that during the trial, many state employees acknowledged that they did not know why things were done the way they were in the application process.
“How many times did the state say ‘I don’t know?’” Bolt asked. “Nevada deserves better.”