Maine’s Legislature Confronts the Unintended Consequences of Required Marijuana Testing, Before Those Consequences Even Happen

The Maine Legislature’s Joint Standing Committee on Veterans and Legal Affairs will consider a host of marijuana-related bills next Monday, January 27. Check all five of them out here. The one I want to focus on is LD 1545, An Act Regarding the Testing of Adult Use Marijuana and Marijuana Products because this bill tries to address what has been a serious problem in most states launching adult use programs: a shortage of testing labs and resulting bottlenecks in those products.

For starters, LD 1545 seeks to amend language in Title 28-B, governing adult use marijuana in Maine, which currently requires ALL adult use marijuana or marijuana products to be tested by a licensed lab before sale. So what’s the problem with this? There’s serious and well-founded concerns that Maine simply won’t have enough testing labs at least for the launch of the program. This will lead to bottlenecks and significant delays in selling products to consumers. LD 1545 addresses this by permitting any product that has been held by a testing lab for five days without being tested to be sold anyway, with a disclaimer that the product hasn’t been tested.

This seems like a straightforward solution to an anticipated problem, but it seems worth looking briefly at the experience of other states with testing bottlenecks and lab shortages.

California’s lab shortages and bottlenecks circa 2018 were the stuff legends are made of. Now, if anything, California seems to have overcompensated in response and has 27 licensed labs (which isn’t that many, considering the state’s population), none of which report being at full capacity. These labs are facing business problems of their own, with many customers not paying timely or not paying at all. Some suggest that this is a symptom of the broader problem that California’s illicit marijuana market remains dominant and may even be getting stronger.

Closer to home, a shortage of testing labs has been a problem for Massachusetts. As is expected for Maine, Massachusetts started off with only two licensed testing labs. Labs were reporting demand for up to 4,000 tests per day, though, within a year of the adult use program’s launch, the state’s Cannabis Control Commission was reporting that, even with two labs, wait times were down to just a couple of days.

It’s hard to know exactly how Maine’s testing laws will affect the adult use market until that market has really taken off. Certainly, any serious impediments to selling product quickly will encourage return to the black market. I’m sure this will be part of the discussion in the VLA committee on Monday. See you there!

Portland Considers Giving Some Preference to Minority Applicants for Marijuana Retail Licenses

The City of Portland is considering giving preference to minority applicants when distributing retail marijuana licenses. This came up at the City Council’s last committee meeting on the draft ordinance, and city staff cautioned that this could be difficult to administer. After this conversation, I thought it would be worth looking briefly at how this has played out in other jurisdictions. 

There is no question that America’s "war on drugs" and the crackdown on marijuana disproportionately impacted black Americans and other minorities. This sad history is the impetus for the proposal in Portland, and proposals/laws in other jurisdictions. Here are four examples of how this has played out:

• In Maryland, there was no preference for minorities originally, but then nearly all of the licenses were awarded to white people and the state decided to try again. It increased the total number of licenses, and said it would give minority-owned businesses (and some other demographics) slight preference. That plan doesn’t seem to be playing out as envisioned; it is dragging on and on and on, amid multiple lawsuits alleging bias in the licensing process. 
• The Ohio legislature created a racial quota requiring 15% of all licenses to grow, process, and sell marijuana to be awarded to minority-owned and -operated companies. But state judges have said that law is unconstitutional. 
• In Massachusetts, the Cannabis Control Commission is limiting certain types of licenses to “economic empowerment and social equity applicants” along with "microbusinesses."  These include social consumption and delivery licenses. Exclusivity is planned for a period of years. These categories of licenses haven’t been awarded yet, so we will see how that process plays out. 
• The marijuana legalization law in Illinois (for adult use) includes a variety of provisions meant to expand opportunities for people of color and those “disproportionately impacted” by the war on drugs. But some are questioning whether this law will meet its goals since the adult use market launches this month, and for at least the first half of 2020 the only participants will be existing medical marijuana dispensaries which are almost entirely white-owned. It is not yet clear how many of the 75 licenses awarded later this year will actually go to demographics disproportionately impacted by the war on drugs. 

Maine does not have any such law at the state level, so we will wait and see how the Portland City Council deals with this issue moving forward.

Can We Use Commercial Cannabis to Address Historical Inequities?

Here in Portland, a number of City Councilors have been adamant that Portland’s adult use program should benefit minority communities. There is a current proposal to give historically disadvantaged groups some level of preference when applying for licenses. This mirrors a common sentiment nationwide that the adult use industry should benefit those communities historically disproportionately affected by marijuana-related prosecutions. 

Chicago has one interesting idea for how this could happen. Chicago’s Mayor Lightfoot has proposed a “social equity program” that would essentially create a co-op for growing adult use marijuana and allow minorities to invest through small cash investments or sweat equity. The Mayor has proposed using $15 million in municipal funds for this project. It would be interesting to see this play out, if it gets off the ground.

Mainers May Be Hot to Invest in Marijuana, but Out-of-State Money Is Still a Necessity

The website patch.com has posted a report that Maine is the no.1 state for marijuana investments. This doesn’t mean that Maine has the most investor dollars in marijuana, but just that Maine investors are more interested on average in marijuana stocks than investors in other states. I took interest in this report because it brings us back to our concerns over Maine’s restrictions on out-of-state investment in marijuana businesses. Sure, a high percentage of Maine residents are interested in the pot sector, but there just aren’t that many Maine investors compared to other states, and even fewer high-dollar investors. 

Starting a sophisticated marijuana business takes a lot of capital and banks are lending to this sector, so investment is needed. By necessity, the bulk of this investment needs to come from out of state to really jumpstart Maine’s adult use sector. Overly restrictive laws that prohibit this investment will only stifle the industry.

The Maine Office of Marijuana Policy Re-formats/Changes (?) Residency Requirements in Response to Rulemaking Comments

The OMP released provisional adult use marijuana rules late yesterday. These rules are majorly substantive, so they are now headed to the legislature. It seems likely that the Veterans and Legal Affairs Committee will hold its public hearing on these rules as early as Monday next week.

While there’s a lot to unpack in this newest iteration of the OMP rules, I’ll focus briefly on the residency requirements today. The provisional rules eliminated two notable subsections from Section 2.3.1(B) that were present in earlier iterations. These are the two subsections which OMP eliminated:

(b)(i) No person or entity shall attempt to subvert this paragraph by way of multi-layered corporate structures or other methods for creating a corporate veil, nor through other equity conveyance tools, including without limitation, purchase options and purchase warrants. The Department may deny an application at its discretion for violation of this provision.

(b)(ii) No person or entity shall create a party of control to a marijuana establishment License consisting of less than a majority of residents.

Before you read too much into the deletion of these paragraphs, the OMP justified removing these paragraphs in its response to specific comments:

“The Department has removed the language of sub-parts (B)(i) and (ii) with the understanding that the powers contained therein were inherent in the powers granted by the Legislature to the Department in statute. These provisions were determined to be duplicative by the Office of Marijuana Policy. Action taken by OMP to remove these provisions should not be construed as a limit on the power of the Department to pierce any corporate veil intended to obfuscate the residency requirements intended by the Legislature in Title 28-B. The Department has clarified in rule that the applicant shall bear the burden of proving majority ownership by residents.”

Lastly, the OMP also added additional language to the residency requirements in Section 2.3.1(B)(b), so now that subsection reads (with the new portion underlined):

“A majority of the shares, membership interests, partnership interests or other equity ownership interests as applicable to the business entity must be held or owned by natural persons who are residents or business entities whose owners are all natural persons who are residents of the State of Maine. The applicant shall demonstrate to the Department that a majority of the shares, membership interests, partnership interests and other equity ownership interests are held by residents of the State of Maine.”

Next, the legislature will have the opportunity to make changes to these provisional rules, and will certainly be considering how these residency provisions jive with the Department’s claim to “inherent powers” derived from Title 28-B.

The Public Hearing on Proposed Adult Use Cannabis Rules Is Over, But the Public Comment Period Continues

The public hearing on the proposed adult use cannabis rules took place this morning at the Holiday Inn in Portland. The room was packed with a pretty diverse group of industry folks – banks, towns, and marijuana establishments large and small were all well-represented today. Comments were limited to three minutes per person, and the hearing took barely more than two hours total. Some of the reoccurring issues throughout the morning included: 

• Concerns that testing labs will be a serious bottleneck and drag on the adult use industry
• A number of smaller operators are worried that the rules are too comprehensive and "onerous" and will drive the industry underground
• Concerns that the rules will limit out-of-state investment and make it difficult to work with experts and consultants from other states
• Questions about confidentiality provisions in the rules and the degree that applicant info will be publicly available

The panel of regulators from Department of Administrative and Financial Services (DAFS) and the Office of Marijuana Policy (OMP) seemed to be diligently taking notes this morning, and we’ll have to wait and see how amenable they are to changing the rules as a result of this process. It’s a safe bet that written comments (due June 2) will be more impactful than today’s three-minute spiels, but how impactful, we don’t know. The OMP says that they plan to provisionally adopt final rules and send those rules to the legislature for approval in June. If approved by the legislature, then the rules would likely be scheduled to take effect 90 days later.

Federal Efforts to Relax, Just a Little Bit, About Marij(h)uana

Former Attorney General Jeff Sessions was famous for (among other things) his heavy opposition to marijuana legalization. His approach flew in the face of the dozens of states that have legalized medical and/or adult use marijuana, and seemed like it was leading toward a Wild West-style showdown. But Jeff Sessions is gone now, that excitement has dwindled for the time being, and Congress is even trying to take a baby step toward aligning federal law with legalization at the state level. 

The STATES (Strengthening the Tenth Amendment Through Entrusting States) Act is old news at this point, but it could be important and this is a new blog, so I’m going to briefly write about it anyway. This bill, currently before Congress, states that enforcement of the federal prohibition on marijuana “shall not apply to any person acting in compliance with State law relating to manufacture, production, possession, distribution, dispensation, administration, or delivery of marihuana.” (Side note: What’s up with the feds spelling "marijuana" with an "h"? If you know, please tell us!) 

The STATES Act is bipartisan, with co-sponsors including Senator Cory Gardner (R – Colorado) and Senator Elizabeth Warren (D – Massachusetts). And, in perhaps the most controversial moment of his short tenure as Attorney General, Bill Barr has offered at least tepid support for the legislation. So stay tuned.

What’s up with the Residency Requirements in the Proposed Adult Use Rules?

If you’ve looked at the proposed adult use rules, you’ve probably noticed some pretty expansive language limiting the ability of non-Mainers to play really any role in a Maine marijuana business. The Marijuana Legalization Act already requires that every officer, director, manager, and general partner of a marijuana business must be a Maine resident, and requires that “a majority of shares” or “other equity ownership interests” must be held by Maine residents (See 28-B MRS § 202(2)). Now the proposed rules go way beyond these restrictions in statute. 

The statute allows 49% of a business to be owned by non-Maine residents, for example. The rules, though, prohibit any out-of-state person or entity from exerting “more than minimal influence, through direct or indirect financial interest, over decisions regarding the operation of a marijuana establishment.” Whoa. To spin this out a bit: If I’m from Delaware and I own 20 percent of a Maine marijuana business, I’m 100 percent in compliance with the law. But wouldn’t a 20 percent owner necessarily exert “more than minimal influence” over decisions of the business? These rules seem to prohibit what the law allows, which makes the legality of the rules questionable. (More on this in forthcoming blog posts.)

Finally, I’ll just note that the proposed rules give the Office of Marijuana Policy Department of Administrative and Financial Services broad authority to dig, deeply, into the corporate structure and dealings of any applicant or licensed business. Check out rule 2.5.1, which allows the Department to “require additional information to verify that business structures, loans, franchise agreements, royalty agreements and other legal arrangements or anything else regarding true parties of interest, parties of control or other interested parties are not being used to circumvent ownership requirements.” Depending on the Department’s motivation, it can keep digging and digging and withhold a license until its satisfied that residency requirements, etc., are met.

(I am trying not to bury too many legal citations in this blog, to make it digestible, but to spell out the residency requirements explained above, check out section 2.3.1(B)(2) on page 15 of the proposed rules, which states that “no person or entity shall create a party of control to a marijuana establishment license consisting of less than a majority of residents.” Now, check out the definition of "party of control" on page 9 of the rules. This definition is frighteningly broad, as quoted above.)