A recent lawsuit in Alabama, challenging the award of medical cannabis licenses by regulators, underscores the potential pitfalls in licensing regimes where applicants are selected based on specific enumerated factors. Below, we examine the Alabama lawsuit in greater detail and consider the alternative policy of utilizing a lottery system to award licenses.

Applicant’s Lawsuit Against Alabama Medical Cannabis Commission

On April 15, a medical cannabis license applicant filed a complaint alleging that the Alabama Medical Cannabis Commission (AMCC) awarded licenses in violation of the medical cannabis statute and the Alabama Administrative Procedure Act (AAPA). The plaintiff seeks a permanent injunction barring any further action by AMCC regarding certain previously awarded integrated facility and cultivation licenses and the appointment of a special master to “determine which applicants are able to satisfy the requirements” of the medical cannabis statute. Importantly, examining these allegations may help forecast similar issues in future litigation with respect to other states’ medical cannabis licensure.

Alabama’s medical cannabis statute (Code of Ala. § 20-2A-1 et seq.) and associated regulations (Ala. Admin. Code r. 586-X-3-.01 et seq.) lead AMCC to evaluate license applications based upon specific criteria. These criteria include how quickly an applicant can commence business operations, an applicant’s ability to minimize costs to patients, an applicant’s financial capability and responsibility, an applicant’s business history, an applicant’s involvement in recreational cannabis in other states, and the extent to which members of minority groups own and manage the applicant entity. Although the underlying statute provides that AMCC “may” consider these some of these factors, AMCC’s own regulations provide that they “shall” be included in its criteria for granting licenses.

According to the recent complaint, AMCC did not adhere to these set criteria when it first adopted a complex scoring system for applications that did not award points for satisfying the mandatory statutory criteria. To address the drawbacks of the scoring system, AMCC then adopted a ranking system, whereby each commissioner ranked all applicants for integrated licenses in descending order. All commissioners’ rankings were averaged into a composite ranking, and the commissioners proceeded to vote on applicants in the order of this ranking. Given that there were only five integrated licenses available, the applicants in positions one through five in the composite ranking were awarded the licenses.

In making procedural adjustments and denying applications in this manner, the complaint alleges that AMCC violated the AAPA by (1) not giving notice as to why any license was denied; (2) failing to provide a process that allowed an unsuccessful applicant to challenge a successful applicant; (3) failing to offer a properly adopted procedure to provide an opportunity to “respond and present evidence and argument on all material issues involved” (Code of Ala. § 41-22-12); and (4) failing to adopt rules governing the inspection and certification of facilities — instead, inspections are conducted in secret by utilizing forms and procedures which were not adopted under the AAPA, the plaintiff says.

The complaint further alleges AMCC’s general failure to observe basic requirements of the medical cannabis statute. For example, AMCC failed to enforce the statutory requirement for applicants seeking an integrated facility license (which includes the roles of cultivator, processor, secure transporter, and dispensary) or a cultivation license to demonstrate at least 15 years of cumulative commercial agriculture experience. It is further alleged that AMCC has ignored the statutory mandate giving the Alabama Department of Agriculture and Industries (AG Department) exclusive authority to issue licenses in the cultivator category. Indeed, the AG Department issued its own regulations applicable to cultivators and integrated facilities (Ala. Admin. Code r. 80-14-1-.01 et seq.)

The allegations in the Alabama lawsuit are characteristic of challenges to ostensibly merit-based methods of awarding licenses. Legal issues in merit-based licensing regimes logically emerge from two potential bases: state administrative procedure statutes and the underlying medical cannabis statute. These pitfalls for regulators may be particularly pronounced where the underlying medical cannabis statute enumerates several specific criteria to consider with respect to awarding licenses. As we discuss further below, awarding licenses through a lottery instead may be a favorable alternative to eliminate a potential basis for legal challenges by applicants.

Two Examples From Other States

Alabama is not alone in awarding licenses through a factor-based evaluation of applications. In Virginia, for instance, the underlying medical cannabis statute does not prescribe specific factors for the Virginia Cannabis Control Authority (VCCA) to consider when evaluating applications (Va. Code Ann. § 4.1-1602). However, VCCA’s own regulations provide a list of factors it “shall” consider, including the results of criminal background checks, the proposed location of the applicant’s business; the applicant’s ability to maintain adequate control against diversion, theft, and loss of cannabis; the applicant’s ability to maintain the understanding, procedures, security controls, and ethics required for optimal safety and accuracy of dispensing and selling cannabis; and whether the applicant’s owner has a financial interest in another license, permit, registrant, or applicant (3 Va. Admin. Code § 10-30-120.B).

Conversely, Kentucky plans to award its first round of medical cannabis licenses through a lottery system. Following the recent passage of Kentucky House Bill 829, a limited number of applicants will be awarded medical cannabis licenses through a lottery before medical sales begin in January 2025. According to online guidance from the Kentucky Medical Cannabis Program, “if the application is determined complete by the program, the business application will be entered into a licensing lottery for the selected cannabis business category if the number of eligible applications exceeds the maximum number of licenses available within that cannabis business category.” In the case of potential legal challenges, a lottery system has the potential to eliminate potential challenges regarding “how” regulators made a particular selection. That is, a disgruntled and unselected applicant could not base a legal challenge on the regulators’ failure to consider certain factors set out in statutes or regulations — indeed, the lottery itself makes the ultimate “decision.” Therefore, legal challenges may be confined to issues regarding the minimum qualifications for consideration in the lottery, and the standard grounds for challenging agency action under the state administrative procedure statute.

Why It Matters

Regardless of the awarding regime, unsuccessful applicants are likely to challenge the outcomes of license awards. This is especially true when a limited number of medical cannabis licenses are granted for each category. Lottery systems for awarding licenses in a pool of screened applications may be a more favorable option for states establishing medical cannabis regimes and creating a highly competitive landscape of scarce licenses. Industry members should continue following along for updates regarding medical cannabis licensing and the inevitable legal challenges emerging therefrom.

Our Cannabis Practice provides advice on issues related to applicable federal and state law. Marijuana remains an illegal controlled substance under federal law.