Cannabis Law Case Study Q&A

Last year, we shared the news that MGA’s Joseph Gutierrez successfully represented Thrive Cannabis Marketplace in a six week trial at the Las Vegas Convention Center regarding the State of Nevada’s 2018 marijuana dispensary licensing process. With the recreational marijuana industry in the State of Nevada being relatively new, the licensure of cannabis has been an ongoing and nuanced area of law. We sat down with Joseph to get a better understanding of Nevada’s recreational retail marijuana industry and the litigation that ensued from the 2018 marijuana license application process. 

Q: How did the legalization of recreational marijuana become a reality in Nevada?

JG: Nevada voters passed the sale of recreational use marijuana in November of 2016 through a ballot initiative for a state constitutional amendment. The purpose of the ballot initiative was for the State of Nevada to regulate the recreational marijuana industry similar to the alcohol industry and to take the sales out of criminal hands. More importantly, the ballot initiative provided that the use of tax dollars from the sale of recreational marijuana would be for K-12 education spending.  

Prior to legalizing the sale of recreational marijuana in Nevada, the Nevada legislature in 2014 passed laws allowing for the sale of medical marijuana. With the passage of the 2016 ballot initiative legalizing the sale of recreational marijuana, licensed dispensaries were allowed to sell marijuana to people over 21 years old. In July 2017, Governor Sandoval allowed an early start program for those companies with medical marijuana licenses to then sell recreational marijuana. The demand for recreational marijuana was so great that businesses ran out of product within a week.  

Q: How does a business obtain a license to operate recreational marijuana dispensaries?

JG: Qualified businesses must be vetted, established in the community, proven to have paid taxes, and shown operational stability. The number of recreational marijuana licenses is limited by state statute, and the entire process is highly regulated through the newly formed Cannabis Compliance Board. The last application process for new dispensary licenses was in September of 2018 and opened to existing license holders. The application and grading process involved a detailed application and background check for each business seeking a license. The Nevada Department of Taxation, who was previously responsible for the oversight of licenses for the cannabis industry and the collection of taxes, oversaw the application and grading process.  

The Nevada Department of Taxation had the challenge of setting up an impartial and numerically scored grading system for the 2018 application process. They developed the scoring criteria, created the application, and contracted with a third party to hire and train graders to score applications out of a 250-point scale. 

Those wanting dispensary licenses had to list in which county they were seeking a license. The license application process began in September 2018, and the results were released in December 2018.  My client Thrive spent hundreds of thousands of dollars on its applications to be competitive, and they scored amongst the top applicants throughout all categories in Nevada. 

Q: Who were the plaintiffs in the lawsuit that followed the release of the winning applicants?

JG: The plaintiffs were a group of companies who applied for dispensary licenses in the 2018 application round and lost. They did not receive high enough points based on the application’s criteria to place themselves ahead of the license-winners and then filed a lawsuit against the Nevada Department of Taxation and license winners.  

Q:  Why were there a number of different lawsuits in 2019 after the application process was decided?

JG:  In December of 2018, the losing applicants received a letter from the state informing them that they failed to achieve a high enough score to move forward in the process to gain a license. These companies banded together and brought a series of lawsuits challenging the results and claiming there was collusion and fraud in the application process.  

There were only a finite number of licenses available for the entire State of Nevada, and the plaintiffs still wanted licenses for themselves, so they decided to sue.  Ultimately, the judge heard all the evidence in the case and upheld the validity of the 2018 application process.

Q: What did the plaintiffs claim was the problem with the scoring and application process?

JG: The plaintiffs argued that the Nevada Department of Taxation, the entity in charge of the 2018 application process, conducted the application and grading process in an “arbitrary and capricious” manner so as warrant invalidating the entire application process and licenses awarded. The plaintiffs also claimed there was “collusion” with the process and sought it to be re-done. However, after a lengthy litigation and trial, the plaintiffs did not have any evidence of collusion, and many of the plaintiffs who complained the loudest failed to appear at trial to back up their claims. The trial revealed that there were some good companies who did not prepare complete applications or did not follow the clear instructions in the application that lost points and ultimately did not get a license.  Thrive and the other license winners put in the hard work and attention to detail necessary to score higher than the other applicants.  

Q: What was MGA’s role in this lawsuit?

JG: MGA initially represented Essence and Thrive throughout most of the litigation in 2019. These two companies had won a total of 14 licenses in the 2018 application process. Since Essence and Thrive were both license winners, MGA’s role in the lawsuit was to help in defending the 2018 application process and defending the licenses each company was awarded. After winning at the preliminary injunction hearing stage in 2019, MGA defended Thrive for the remainder of the litigation and throughout the trial in the summer of 2020.

Q: How was the trial conducted?

JG: The trial was a bench trial, which means the judge serves, and the judge and jury decide both the facts and law for the case. Due to the number of attorneys involved in the case, the trial was conducted at the Las Vegas Convention Center, so we had enough space for everyone to be socially distant. Everyone was required to wear masks at all times, and the judge did an excellent job in creating a safe and efficient manner for this trial to get completed.  

Q: What was the result of the trial in this case?

JG:  The trial lasted six weeks, and ultimately the court ruled in favor of the State of Nevada and the license winners by finding that the Nevada Department of Taxation’s 2018 application and grading process was valid.  However, the court did find that one of the recreational marijuana regulations adopted by the state regarding background checks of owners was not constitutional because it conflicted with the language of the 2016 ballot initiative. Fortunately, Essence and Thrive had completed complied with this regulation by having all of their owners’ backgrounds checked, so the ruling on that issue did not apply to their companies.  

Q: What is your opinion on how the 2018 recreational marijuana application process worked out?

JG: The 2018 application process worked as intended as the state created an impartial and numerically scored application process that awarded licenses to the best applicants. Each plaintiff was given a chance to appear to trial and testify as to why they thought they were superior applicants or should have been awarded a license. However, only one plaintiff voluntarily took the witness stand to testify in support of the losing applicants’ claims. Other losing applicants dodged service of subpoenas to appear and trial and remained out of state during the trial to avoid having to testify.    

Q: What is your opinion on the court’s ruling on the trial?

JG:  The court issued a very thorough final trial order that was fair, detailed, and ultimately approved the 2018 application process and award of licenses. The judge and her staff did an excellent job in accommodating the parties, attorneys, and witnesses in the case to ensure the courtroom was COVID-compliant, and she allowed all the parties to present their evidence and witnesses at trial so that she had all the information she needed to issue her final ruling. Click here to read the court’s order. (LINK TO PDF)

Q: Who is now regulating the cannabis industry?

JG: On July 1, 2020, the State of Nevada created the Cannabis Compliance Board to take over for the Department of Taxation in regulating the cannabis industry in Nevada. The Cannabis Compliance Board was established through Assembly Bill 533 during the 2019 legislative session, and it was signed into law by Governor Sisolak. The Cannabis Compliance Board consists of five members who are appointed by the governor and have their respective expertise in different sectors of the economy that touch and concern the cannabis industry. These sectors include finance, accounting, legal, law enforcement, medicine, and the cannabis industry itself.

Q: Now that the validity of the licensing process has been approved, what is next for the marijuana industry in Nevada?

JG: The cannabis industry in Nevada industry seems to be unified in moving forward and opening dispensaries with the licenses awarded in the 2018 application process.  With the creation of the Cannabis Compliance Board, the industry is confident the state will continue to improve on the work done by the Department of Taxation and to ensure that Nevada remains one of the leaders in the cannabis industry.  

To receive further information regarding the current cannabis licensing process or any potential litigation dispute, contact Maier Gutierrez & Associates and schedule a meeting with Joseph Gutierrez, Esq.