Cannabis regulators in Illinois face a flood of criticism and litigation from applicants who feel they were unjustly blocked from receiving one of the state’s lucrative retail dispensary licenses.
Dozens of plaintiffs are involved in a federal suit against the Illinois Department of Financial and Professional Regulation, while at least two other groups have submitted similar suits.
The court filings came on the heels of the state’s announcement, this month, that just 21 businesses are finalists in the statewide lottery for 75 licenses. More than 900 applications were filed for the licenses.
Gov. J.B. Pritzker’s office told the Chicago Tribune Wednesday that his staff was planning to meet with stakeholders about the issues, but that dates and times had not been finalized. No date has been set for the state lottery.
“The goal of the Governor and the administration is to take time to ensure that the process is fair and equitable,” Pritzker’s office said, according to the Tribune. “We remain committed to taking our time to focus on fairness before a lottery date is announced.”
The lottery was established to break ties among applicants that received identical scores in the judging process. The 75 licenses up for grabs now are those that weren’t distributed earlier this year due to the pandemic. Because companies can obtain multiple licenses, it is unclear how many of the 21 finalists this month will receive licensing.
Illinois first began issuing licenses last year ahead of adult-use legalization in the state, which began Jan. 1. Those companies that received early licenses appear to be thriving, as the state reported a record-high monthly sales total of $64M in August.
The suits filed this month allege a range of misdeeds, including that the state failed to prevent favoritism and fraud in the application process. Some of them seek to stop the state’s lottery from taking place.
Naomi Williams, one of the applicants who feels she was shut out, filed her own individual suit against the state’s regulators. (Read the suit.)
“I’m honestly surprised that the state of Illinois hasn’t just willingly suspended the process, because at this point, they should recognize that they messed up – really bad,” she said. “And they should be embarrassed by how bad they messed up.”
The Illinois Cannabis Regulation and Tax Act, which legalized REC in the state, passed last year with certain stipulations meant to aid applicants who had served in the military and those who had been adversely affected by prior cannabis laws.
The social equity portion of the bill allows for scoring bonuses for applicants who have a majority stake in the relevant business and also live in an area disproportionately impacted by drug laws and/or has been arrested for offenses eligible for expungement under the new law, among other criteria.
At least two of the lawsuits argue that the social equity aspect of the bill was effectively eliminated by the veteran stipulation.
A social equity applicant receives a 50-point boost in the 250-point scoring scale. Applications that included ownership stakes by military veterans were given an extra five points in the scoring process. That turned out to be significant. Of the 21 finalists that advanced to the lottery, all of which achieved a perfect score, each counts a veteran among its ownership.
The suits allege that the state effectively barred anyone who hadn’t served in the military from receiving a license.
“It doesn’t correlate,” Williams said. “Why do you need to be a veteran in order to get a license?”
Irina Dashevsky, an attorney with Locke Lord, which filed suit on behalf of multiple plaintiffs, also took issue with that veteran rule. She noted that the added benefit to veterans effectively pushed out legitimate social equity applicants, who were intended to be beneficiaries of the law. (Read the suit.)
“We disagree that perfect should be the standard, as that precludes non-veteran owned social equity applicants from participating,” she said. “An ideal result would be to allow more diversity into the lottery.”
Williams, a Chicago native who is looking to open a dispensary in the city, qualified as a social equity applicant, but still missed the lottery. She believes her application must have received an otherwise perfect score, since the state did not notify of her of any issues, which state law requires.
In addition to the veteran stipulation, Williams’ suit also attacked the state’s apparent lack of oversight regarding equity claims.
Her filing cites a May 12 Chicago Sun-Times article that reports on “unscrupulous businesses” targeting people who qualify for social equity licenses. The businesses, according to the article, attempted to use those people as fronts by fraudulently including their information to bolster applications with no intention of the people having an actual ownership interest.
Two of the lawsuits also point out that licenses went to several high-powered, or otherwise connected, applicants. One of the successful applicants was an employee of KMPG, the global accounting firm, which the state contracted to score the applications.
“That alone should’ve been reason enough for them to say, ‘You know what, we need to pause this and do some investigation and make sure we’re doing everything possible to handle this correctly,’” Williams said, “which they still have time to do.”
KPMG has said the employee in question was not involved in scoring the applications.
‘Gotta do something’
Dashevsky said she, too, believes the state can fix the issue. The wave of litigation could lead to a cleanup bill to address the issues raised in the court filings, she noted. It could also lead to the veteran bonus being removed from the legislation, which could open the process to more people.
If those steps are taken, she said the state could still serve as a blueprint for effective cannabis legislation.
“I think a lot about this Act is incredibly thoughtful and I don’t want that aspect of it to get lost due to litigation,” she said. “This is the first stress test on the law and its implementation, as well as on the state, in terms of how to handle this incredibly complicated situation.”
“I hope adjustments can be made now that lead to a more fair outcome for these 75 licenses, as well as those to come in the future,” she added.
Williams, the license applicant, said she is hopeful the state will take the appropriate corrective measures.
She alleged in her suit that the state failed to deliver on several promises to assist and provide resources for social equity applicants, causing many of them – herself included – to pay for those services out of pocket. She said she had spent more than $2,500 just on the application. Given how many applicants were denied, she estimated the state and other third-party companies had made “millions” off of applications that now seem like they were doomed from the start.
Cutting costs was part of the reason she filed her own lawsuit, rather than retaining an attorney.
Despite the unexpected legal battle, she said she was still optimistic she’d be able to open her Avalon Smoke Shop.
“I am confident, just because it’s so obvious they messed up,” she said of the state regulators. “If it was just individuals being upset because they didn’t win, OK. But when we have evidence – and not just my case, but with other cases – showing that you were supposed to this, this and this, and you didn’t do it? I mean, they gotta do something.”
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