Tuesday’s cannabis lottery delayed as lawsuits against OCM sent to state’s Court of Appeals

A Ramsey County judge has ordered Minnesota cannabis regulators to delay the first cannabis license lottery that was set for Tuesday morning.

Judge Stephen Smith, after an hour-long hearing on four lawsuits filed against the Office of Cannabis Management, decided to delay the lottery to give four parties time to appeal to the state Court of Appeals. All four had sued to stop the lottery over their claims that they had been wrongfully denied entry into the lottery.

OCM last Monday notified two-thirds of the 1,800 certified social equity applicants that they would not be moving into the lottery. Then on Friday it set the first lottery for 280 licenses for Tuesday of this week. Social equity applicants are individuals who are in groups that the Legislature stated suffered disproportionately from marijuana prohibitions.

Smith, who called the case both interesting and urgent, issued an order that was both in response to plaintiffs’ fear that their clients would be harmed if they miss the lottery and the state’s argument that the district court lacked jurisdiction. He said he would issue a stay of the cases to allow the four plaintiffs — and perhaps others — to ask the Court of Appeals to rule on whether the OCM followed the law.

“It requires the court to make a decision on very short notice with limited information,” Smith said. “At this point I’m going to stay the matter and have the appellate court review the decisions that have been made.

“With that, there’s no lottery tomorrow and the matter will go to the appellate court and the appellate court can exercise its jurisdiction in determining how this matter should move forward,” Smith said.

The four plaintiffs represented a variety of applicants who received denial notices. Most stated that the OCM did not provide required explanations for the denials or had not previously requested applicants to correct problems in their applications.

One, Aranguiz, Connolly v. Office of Cannabis Management, involved an applicant that had signed an agreement with a third party to sell the business. That, state lawyers argued, was similar to 200 other applicants and ran afoul of state law that requires the applicants to be the owners and controllers of any license. The OCM said it blocked many applications it suspected were using social equity certified applicants to win licenses that would then be controlled by others — so-called straw purchasers.

“The basis for denial ultimately is … you have to disclose who actually is in control of the entity,” said assistant Attorney General Oliver Larson. “If you can be forced to sell your entity to someone else, you are not in control. If someone else is funding your application … you are not in control.

“The fundamental failure here is they were trying to hide the fact that these two plaintiffs were not the true party of interest,” Larson said, calling it “part of an illegal scheme.”

David Asp, the attorney for Cristina Aranguiz and Jodi Connolly, said the agreement they made with another entity allowed for the sale only if it was allowed by state law and regulations and approved by OCM. That, he argued, would make it allowable and did not constitute a legal requirement to sell a license if won at the lottery.

Other plaintiffs were applicants who say they were not given adequate explanation for their denials.

All asked to halt the lottery because they would suffer irreparable harm if they missed the special lottery for social equity applicants and had to try again next year in the general lottery that is expected to have many more applicants.

Courtney Ernston, a lawyer for several denied applicants, described one who paid $5,000 to enter the lottery and would have to pay an additional $5,000 next year. She described another who asked for a cannabis transporter license who, because there were fewer applicants than licenses available, would have won a license had they not been denied last week.

“The best case scenario is that this court must issue this (temporary restraining order) and stop this lottery from happening tomorrow,” Ernston said. That would give time for additional briefing by lawyers and another hearing.

“We’ve got a lottery happening tomorrow that we found out about Friday and it just can’t happen,” Ernston said.

State lawyers argued that the Legislature purposely set up an expedited process in order to provide social equity applicants a head start to prepare to enter the business when final OCM rules are adopted next spring. The law also allows cultivators to put seeds in the ground as soon as they received preapproval licenses, which was meant to get cannabis products ready for sale when stores open.

The law, argued Larson, the assistant attorney general, did not allow appeals such as the cases in court Monday.

“The Legislature understood that in order to get through hundreds of applications, make decisions, hold the lottery and start this process in a matter of a few months, was going to mean there was going to be a truncated review,” Larson said. It specifically said there would be no appeals of denials for the same reason.

Larson said that if the social equity lottery is delayed, OCM could be forced to cancel it and put all applicants — social equity and general applicants — into the same lottery next year.

“That is a real harm to the 600 or so folks who put in an application and did what they were supposed to do and are ready to go through this lottery process,” Larson said.

In addition, assistant attorney general Ryan Petty told Smith that the district court lacked jurisdiction and that the cases should have been filed at the Court of Appeals. He called the fact that the cases were filed in district court “a fatal defect” and asked Smith to dismiss the four cases.

But Asp and others argued that OCM did not follow the law when it did not issue deficiency letters to all applicants with gaps in their applications and then denied two-thirds of the applicants with limited or non-existent explanation.

“The law says that if they deny, they must notify applicant of the denial and the basis for the denial,” Asp said.

Smith seemed sympathetic to the assertion that without a stay the plaintiffs would suffer and also to the argument that district court judges such as himself lacked jurisdiction to rule. That can be determined by the Court of Appeals but such a pathway would not be available if the court didn’t stay the lottery, he said. State lawyers, however, had argued that the didn’t even have the authority to do that much. 

And David Standa, an attorney for other plaintiffs, pointed out that if the lottery was allowed to proceed Tuesday and the Court of Appeals found OCM in violation of the law, a different set of problems would be created.

“What if the Court of Appeals came back and said, ‘Yeah, all these people need to be in the lottery,’” Standa said. “Is the OCM going to take away preapprovals from everyone it issued them to and then rerun the lottery with the people who were supposed to be in it.”

Peter Callaghan

Peter Callaghan covers state government for MinnPost. Follow him on Twitter @CallaghanPeter or email him at pcallaghan@minnpost.com.

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