Losing competitors sue over marijuana cultivation permits

Losing competitors sue over marijuana cultivation permits

The first lawsuit was filed Tuesday over the state Medical Marijuana Commission’s scoring of the top five applicants for cultivation permits under the new medical marijuana law.

The suit was filed by Naturalis Health,  which finished 38th in the scoring, with an application to be in Little Rock.  It asks for an injunction against award of the permits. The suit was assigned to Circuit Judge Wendell Griffen. Defendants are the state Finance and Administration Department, Alcoholic Beverage Control Division and Marijuana Commission. One question is whether the state will raise a sovereign immunity argument against the lawsuit. Gov. Asa Hutchinson seemingly will make the decision. He’s instructed executive agencies not to use the defense without his permission. A judge conceivably could raise the issue on his own.

The suit says decisions were made arbitrarily and in violation of the Administrative Procedures Act.

UPDATE: Another losing applicant, Delta Cannabinoid, later filed an administrative appeal in Lee County, home of one of its owners, retired Judge Olly Neal of Marianna, but I don’t have details on it yet. That group had earlier complained about the process on several grounds, including lack of racial diversity among members.

The Naturalis suit contends there were “wide-ranging discrepancies” and “outright violations” in the applications of the top five scorers — Natural State Medicinals, Bold Team, Delta Medical Cannabis Natural State Wellness and Osage Creek Cultivation. The suit also argues bias or conflicts of interest on the part of commissioners.

Specific shortcomings included a residency requirement, tax liabilities and distance from a church or school of proposed facilities. The suit noted the commissioner, Travis Story, who graded the application of a legal client, and said other commissioners didn’t have the requisite experience for the task. An independent committee of industry experts should have done the scoring, the suit says.

The suit lists numerous cases of corporate charters revoked for non-payment of franchise taxes. But the Department of Finance has already responded to a complaint on this point by saying the rule on deficiencies applies to individuals, not corporations.

The suit faulted scoring. It noted, for example, that no points were deducted on qualifications from the top scorer, Natural State Medicinals, despite the admission that two owners had paid regulatory agency fines of more than $10,000. The suit went on:

The most blatant irregularity in scoring was Chairperson Tillman’s use of a different scoresheet, unlike the uniform scoresheet used by the other four Commissioners. Tillman appears to have provided no numerical scores for several categories.

The suit also airs a complaint about the extraordinarily high score Commissioner Carlos Roman gave the top score, Natural State Medicinals.

Dr. Scott Michael Schlesinger is identified as an owner for NSMC in the application released by the Commission, owning 5.66%. On information and belief, Schlesinger’s ownership interest was known to the members of the Commission, especially since each applicant’s owner, officer, director or board member was required to submit a disclosure statement. Schlesinger’s disclosure statement is attached hereto as Exhibit 15.

Upon information and belief, Schlesinger and Commission member Dr. J. Carlos Roman have an extremely close personal and professional relationship. Schlesinger is the founder  of Legacy Spine and Neurological Specialists, and upon information and belief, Dr. Roman routinely refers patients to Dr. Schlesinger’s medical practice. See Referral Note from Roman to Schlesinger, attached hereto as Exhibit 16.

Not surprisingly, Dr. Roman scored NSMC’s application at a 98 out of 100. The average score Dr. Roman gave out to the remaining cultivation applicants was 55.55 out of 100.

The complaint recounted in detail a conflict first reported here, Commissioner Story’s past legal work for the Trulove family of Berryville, owners of Osage Creek.

Incredibly, Story awarded one of his highest scores of any applicant (94.5) to OCC. Story’s actions are unmistakably rife with inherent conflict and bias; Story should not have participated in the scoring process when the obvious and irreconcilable conflict became known to him. His actions caused harm to Naturalis and further demonstrates the process was flawed, arbitrary and capricious, and unfair to all applicants.

In addition to Story failing to recuse from the selection process, news reports of Story’s text messages indicate he was scoring applicants on the evening of February 25, 2018, five days after the scoring deadline had passed and just two days before the Commission met to select the successful applicants.

The suit objects to the apparent plans to ratify permits Wednesday without a hearing or opportunity for public comment. Absent a review by the commission, a review by the court is appropriate, the complaint says.

The complaint was signed by Jay Bequette of Bequette and Billingsley. The owners of Naturalis LLC are not identified, but they are believed to include Jackson T. Stephens III, grandson of the founder of the Stephens financial empire, who invested heavily in the successful campaign to get the medical marijuana amendment on the ballot. Henry Willmuth is an organizer of the Naturalis LLC.

Here’s their lawsuit.

UPDATE: From Dustin McDaniel of Natural State Wellness:

“The lawsuits that have been filed are without legal merit. Also, with regard to our applications, the Lee County lawsuit is factually inaccurate. In our applications to the MMC, John Terry and Chris Hewitt were accurately identified as officers of Harvest, Inc., not NSWE. Neither person is an officer, manager, or owner of NSWE. Furthermore, in the application to the MMC, Mr. Ryan Young was properly identified as 100% Asian American, which he is.”