Serious challenges remain for adult-use businesses
The legal and business landscape for Massachusetts — the first East Coast state to authorize adult-use cannabis — is becoming clearer as the industry gains experience and passes key milestones. It’s been two years since the state Cannabis Control Commission (CCC) issued its initial adult-use regulations in March 2018, and a year-and-a-half since the November 2018 opening of the first adult-use cannabis stores.
With the first full year of adult-use cannabis sales approaching $400 million from 33 retail stores, Massachusetts is poised to expand the success of its adult-use operations in 2020, but serious challenges remain.
Impact of COVID-19
COVID-19 looms over the Massachusetts adult-use industry. On March 23, 2020, Governor Charlie Baker issued an order requiring closure of all businesses and organizations not providing “essential services.” In contrast to other states with adult-use operations, Massachusetts declined to classify adult-use licensees as essential businesses. Medical cannabis met the essential test, and the state allowed dispensaries to remain open. Governor Baker justified the adult-use prohibition based on concerns that non-Massachusetts residents would cross state borders to purchase adult-use cannabis, causing unnecessary health risks. To date, he has rejected arguments that cross-border impacts could be addressed by requiring purchasers to show Massachusetts state IDs and implementing social distancing.
The current shutdown is harming Massachusetts adult-use providers — many of which are newly licensed and counting on sales revenues to offset high startup costs. Additionally, virtually none of the adult-use retailers will qualify for federal financial support or other relief programs enacted to aid businesses and employees affected by COVID-19.
The CCC is softening the blow somewhat by allowing adult-use licensees to sell product to medical-use outlets. On April 8, a coalition of adult-use and medical providers sued to challenge the adult-use ban. Only time will tell if this pandemic-caused business interruption will be a mere setback or a fatal blow to the Massachusetts adult-use industry.
From the start of licensing in spring 2018, the CCC established an onerous application process for cannabis licensees. The pace of licensing was initially sluggish but began to move faster in late 2019 and into 2020, and both operators and CCC staff are working through implementation details of how the regulations work in practice. Operators hope the COVID-19 pandemic will not interrupt the process.
Regulation amendments in late 2019 added new cannabis licenses for home delivery and a limited trial for social-use establishments (so-called “cannabis cafes”) following required legislative authorization. Eligibility for both new licensing categories is initially limited for up to two years or longer to provide a competitive foothold for CCC-specified disadvantaged applicant categories.
By informal policy, the CCC in late 2019 expanded the initial set of licensees entitled to expedited processing beyond co-located medical-use providers and economic empowerment applicants to include microbusinesses, outdoor cultivators, craft cannabis providers, social equity program participants and providers qualifying as minority-, women-, disabled- or veteran-owned businesses. This prioritization expansion reflects an additional effort to jumpstart cannabis licensing of smaller and more entrepreneurial cannabis businesses.
Despite the relatively slow start, current totals of CCC-issued operating licensees for the largest categories are: 49 retail stores; 34 cultivators; 31 manufacturing; and six from other categories. Another 100-plus applicants have received at least provisional licenses.
Following a lengthy process of local consideration, voting and several legal challenges, approximately one-third of Massachusetts municipalities elected not to permit adult-use cannabis operations within their borders, and a substantial portion of those allowing cannabis operations imposed license limits. Nevertheless, numerous municipalities across the commonwealth remain open to adult-use cannabis businesses.
One licensing challenge is that applicants cannot file with the CCC until they certify execution of a host community agreement (HCA) with the siting municipality. Some municipalities sought to leverage this bottleneck status by demanding compensation exceeding the 3% state law maximum fee on gross revenues, thereby driving up operator costs and threatening to push out applicants that could not or would not overpay for municipal access. This barrier seemed without a solution, because the CCC initially lacked legal authority to review and reject applications with HCAs that exceeded state compensation limits.
These HCA practices abated after (a) a fall 2019 criminal investigation by the U.S. Attorney’s Office into excessive HCA demands by the now-indicted mayor of Fall River and increased scrutiny into HCAs by many other municipalities, and (b) active legislative efforts to grant the CCC express HCA review authority. As a result, municipalities have voluntarily curtailed oppressive HCA demands.
Even with the unfortunate COVID-19 shutdown challenges facing the Massachusetts adult-use industry, the CCC continues to process an increasing volume of applications, which should result in numerous applicants moving closer to operating status once the crisis ends. Elimination of processing impediments at the CCC and in municipalities should help the industry resume the momentum it was building before the COVID-19 pandemic.
Robert J. Munnelly is a regulatory lawyer at the Boston law firm of Davis Malm. He has extensive experience dealing with legal issues faced by clients in highly regulated industries such as electricity, communications, natural gas and water. His experience in these areas led him to pioneering efforts representing existing businesses and those seeking to do business in the emerging Massachusetts cannabis market.