Regulating marijuana licensure has proven to be an extremely complicated endeavor for states that have legalized medical and/or adult-use cannabis in recent years. Creating a regulatory framework for a newly legalized controlled substance from scratch is inherently challenging. However, implementing a licensing system that is fair to applicants who want to take advantage of the huge economic opportunity presented by legalization, while ensuring that markets aren’t oversaturated – which could have negative repercussions on the communities that host them – is especially difficult.
Understandably, several states have adopted licensing policies and selective application review processes aimed at constraining the market; encouraging the success of small, local businesses over large, wealthy players; and enabling disadvantaged and previously harmed populations to fully participate in (potentially) highly lucrative marijuana business opportunities. Also understandably, states have given municipalities a lot of leeway in how marijuana is regulated in their jurisdictions, including varying degrees of control and influence over who is able to obtain a license.
But despite the good intentions of policymakers, restricting access to marijuana licensure has had the effect of supercharging competition for the limited number of available licenses, and many licensing policies have been bogged down by court challenges that have stalled progress on getting several state markets off the ground. Furthermore, as we’ll see, the high degree of control afforded to many municipalities has created dysfunction in markets across several states, resulting in an extremely complex patchwork of state and local regulations that is incredibly hard for aspiring marijuana entrepreneurs to navigate. In extreme cases, this local control – combined with the highly competitive nature of burgeoning marijuana markets – has led to outright corruption. And despite well-intentioned efforts to help marginalized and underrepresented groups succeed, many social equity programs are struggling to get off the ground or failing to achieve their ends, leaving applicants shut out of the licensing process.
In this article, we’ll examine some of the factors surrounding marijuana licensure that create challenges for both applicants and regulatory agencies.
Licensing requirements and review processes leading to dozens of court challenges
The licensing process can be complicated and lengthy for applicants who wish to participate in the legal marijuana market. Because there are many processes involved – including cultivation, processing, manufacturing, testing, and retail distribution – states offer several different license types (California, for example, has 14), and each have their own requirements and fees. Many states require licensees to first obtain a conditional/provisional (temporary) license before being able to apply for a permanent one.
Applicants face a multitude of hurdles to obtain their licenses. The process can be extremely competitive, and some states impose caps on the number of licenses that can be issued (or allow municipalities to do so), limit the number of licenses that licensees can have, or only accept applications during specified periods. The review process can be long, and it often involves a scoring system that is administered by the regulator or a third-party agency.
As states have been legalizing medical and adult-use marijuana at different times, concerns often arise in nascent markets that large, wealthy players will pour in from out-of-state and dwarf homegrown businesses. Some jurisdictions implemented a residency requirement for licensure to help ensure that local small businesses succeed in the market, although many states are abandoning this practice due to mixed results and court challenges (as was the case in Maine). States and cities have tried to favor long-term residents in other ways as well, including through regulations or scoring systems that give locals preferential treatment. But these, too, have met resistance from court challenges, which happened in Detroit, Michigan, Portland, Maine, and Illinois.
If an applicant’s license is denied, they can often challenge the regulator’s decision through an appeal process, although it’s usually an expensive, time-consuming, and complex endeavor. Many unsuccessful applicants have taken their grievances with the licensing process to the court system, resulting in dozens of lawsuits across states and municipalities alleging unfairness, “arbitrary or capricious” application of the licensing scheme, technical errors resulting in denial, or corruption. Outcomes have been mixed, but generally, the courts have sided with relevant departments in cases involving arbitrary and capricious allegations, with lawsuits over errors having greater success for plaintiffs.
Local control further complicates marijuana licensure and can breed corruption
Municipal opt-outs, zoning and permit regulations, and community control over cannabis regulation in their jurisdictions are other factors that can significantly complicate marijuana licensure and prevent businesses from obtaining or keeping their licenses. States typically leave room for municipalities to opt out of the adult-use cannabis marketplace, which usually means that marijuana retail and on-site consumption businesses can’t get licenses to operate in their jurisdictions (although possession and use of cannabis by legal-aged adults remains legal in these areas). Reasons why localities choose to opt out include NIMBYism and uncertainty surrounding the impacts of adult-use cannabis on communities (especially children). In practice, opt-outs create inconvenience for consumers, increase competition in areas that do allow marijuana businesses to operate, and allow illegal cannabis businesses to flourish.
In New York, municipalities had until Dec. 31, 2021, to opt out of allowing adult-use cannabis retail dispensaries or on-site consumption licenses from locating within their jurisdictions. According to a tracker from the Rockefeller Institute of Government, 764 out of 1,520 municipalities had opted out of dispensaries and 883 opted out of on-site consumption sites as of April 2022. In California, which is home to the world’s largest legal cannabis market, only 161 out of 482 municipalities and 24 out of 58 counties have opted to allow commercial cannabis activity of any sort as of December 2021.
Even in regions that don’t opt out, localities can impact marijuana licensure by implementing zoning restrictions, permit requirements, and other regulations. It’s common for municipalities to implement buffer rules that prevent marijuana businesses from locating within a certain distance from schools, day-care centers, parks, religious sites, rehabilitation centers and/or other specified public spaces, but regulations can extend into operational and other aspects of the business such as facility size, parking, deliveries, security, lighting, and signage. Depending on the area, this complex web of local and state regulations can be extremely difficult for marijuana entrepreneurs to navigate and often requires expensive legal services, but it’s the responsibility of applicants to demonstrate compliance so they can obtain and keep their licenses.
In many areas, municipalities can exert control over who gets a license in direct ways as well. For example, California requires that businesses obtain a local license in addition to their state license, and in Massachusetts, applicants must secure permission from the municipalities in which they plan to operate through a Host Community Agreement (HCA). HCAs are contracts that outline the terms and conditions that licensees must comply with, including provisions on how the business will benefit the community. They can also include community impact fees (totaling no more than 3% of the gross annual sales) intended to compensate municipalities for costs imposed by the operation of the marijuana business. However, in addition to these fees, HCAs commonly include other mandatory payments such as donations to local charities that can add up to tens of thousands of dollars in extra costs for businesses.
Massachusetts’ HCAs, and local control over cannabis licensing policies more broadly, have been heavily criticized for their potential to be abused and essentially create a ‘pay-to-play’ system where only wealthy applicants who can afford to pay exorbitant fees or buy influence will be able to obtain a license. A 2018 Boston Globe investigation found that few, if any, HCAs complied with state law, and numerous allegations of corruption, bribes, and extortion – including the high-profile case of Fall River Mayor Jasiel Correia – led to a federal grand jury investigation that issued subpoenas to several Massachusetts towns. In response to the controversy surrounding HCAs, the Massachusetts legislature proposed substantial changes to marijuana regulations earlier this year, which if passed, would require municipalities to prove that community impact fees properly reflect the actual costs imposed on communities as well as prohibit additional mandatory payments. The new bill would also give the Cannabis Control Commission authority to review HCAs and strike terms or conditions related to community impact fees if necessary – oversight powers it previously lacked that would help the agency ensure the licensing process is fair for applicants.
Addressing social equity in marijuana licensure policies remains a struggle despite state efforts
Social equity policies are another challenge for state regulators that have also gotten tied up in courts or otherwise undermined, which in many cases has harmed the people they were intended to help by creating new barriers to marijuana licensure. The War on Drugs has had a devastating impact on millions of Americans, resulting in convictions for marijuana-related offenses that have barred citizens from obtaining housing, employment, and occupational licenses. As more states legalize medical and adult-use marijuana, many have moved towards addressing these harms by embedding social equity policies in their licensing processes that encourage and enable people from communities that have been disproportionately harmed by past marijuana prohibition and enforcement – as well as other underrepresented or marginalized groups – to fully participate in the legal cannabis market.
Massachusetts led the way with its Social Equity Program, a free, statewide assistance and training program that provides participants with education, skills, and tools needed for success in the industry. Although completion of the program does not guarantee licensure, it does offer several benefits for participants, including: waived application fees; a 50% reduction in annual license fees; and exclusive access to Social Consumption and Delivery-Only License types for up to a minimum of three years. In addition, the state also introduced fast-tracked licensing review processes for Certified Economic Empowerment Priority Applicants.
But while Massachusetts’ initiatives served as models for other states looking to incorporate social equity policies into their regulatory frameworks on cannabis, their success has been significantly undermined by local control. A POLITICO article reported that out of 122 women, minorities, and veterans who should have received priority as economic empowerment applicants when the state legalized marijuana in 2016, only 27 had submitted applications to the state, eight had received a license, and none were open for business as of the article’s publication in March 2020. Both activists and state officials blamed lack of oversight of the state’s Host Community Agreement (HCA) system for creating a climate of corruption that has shut groups out of the licensing process.
Other jurisdictions have also faced challenges with implementing social equity policies into their marijuana licensing processes. Illinois’ social equity program has failed to get off the ground and is currently tied up in courts, leaving applicants stuck paying thousands of dollars in costs (while being unable to operate) until issues are resolved. In Arizona, state regulators are currently facing a third lawsuit over adult-use marijuana social equity licensing in the state. And in California, social equity programs in several cities have been criticized for not doing enough to help applicants access capital.
Federal legalization would transform U.S. marijuana markets and could help state regulation
Establishing a regulatory framework is an extremely complicated task, and it can take several years after a state’s passage of legislation legalizing adult-use and/or medical marijuana for the market to be up and running. As more states move towards legalization, they can learn from the successes and challenges of early adopter states as they establish their own frameworks, but it’s still uncharted territory and there’s immense pressure to get it right. Implementing fair licensure policies is especially challenging and further complicated by the control and influence that municipalities have over cannabis regulation in their jurisdictions.
Federal legalization of marijuana would transform the cannabis market in the U.S., making it easier for entrepreneurs to access capital while eliminating barriers to interstate commerce and research that exist today. Although it would add a new layer of complexity to an already complicated landscape, a federal framework on cannabis could also help states regulate their cannabis markets by providing leadership on important areas such as safe production and consumption, preventing Big Tobacco and alcohol companies from taking over the industry, and addressing the harm caused by past marijuana criminalization. Hopefully, as the latest iteration of the Marijuana Opportunity Reinvestment and Expungement (MORE) Act heads to the Senate after its recent passage by the House of Representatives, federal legalization is finally on the horizon.
