Marijuana licensing hangover continues with partial preliminary injunction ruling

Nevada News

State Department of Taxation officials may one day look back on their recreational marijuana licensing debacle and smile at the lessons learned during Nevada’s great cannabis gold rush of 2018, but I suspect it won’t happen for a long, long time.

Not after the thorough smackdown the department received Friday by District Judge Elizabeth Gonzalez, who issued a 24-page partial preliminary injunction following a bruising battle between marijuana companies that wound up giving the state’s licensing authorities a black eye. Under the ruling, some businesses that won lucrative licenses in December will be put on hold pending the outcome of a trial after the judge determined the department had failed in several areas, including providing insufficient identification of owners, officers and board members.

Gonzalez saw what state officials should have seen — presuming they were looking: Some successful applicants failed to follow the rules. Her heavily annotated decision, built to withstand appeal, stops the state from conducting a final inspection on some licensees pending the outcome of the ongoing litigation.

Admittedly, those rules are evolving. With all concerned parties, including state taxation, chasing the enormous revenues the new dispensaries were expected to generate, the judge determined what the department should have seen: corners were cut. At times, the state didn’t follow its own rules. 

Worse yet for the state, plaintiffs attorneys have argued pretty persuasively that the process was tilted in favor of some at the expense of others. Taken separately, some of the missteps might appear inadvertent, even innocuous. But they add up.

The judge surmised the voters’ will was violated when the department “acted beyond its scope of authority when it arbitrarily and capriciously” replaced required background checks for each prospective owner to only those with at least a 5 percent stake in the company. Was it simply a sloppy decision made in the rush to approval, or a sign of favoritism? Maybe one day we’ll find out.

When the department on July 30, 2018 made revisions to the applications, it sent the updated application to all participants in its directory. Trouble is, not all applicant’s emails were accurately listed in the directory. Another small mistake on the sprint to licensure.

We are to believe the licensing process was conducted by trained temporary employees, who received their tutorials just before reviewing 462 applications before the preliminary licenses were granted in December. Who knows, maybe they were quick studies.

Let’s just say Judge Gonzalez remained skeptical.

“It is unclear how the DoT trained the Temporary Employees,” she wrote. “While portions of the training materials were introduced into evidence, testimony regarding the oral training based upon example applications was insufficient for the court to determine the nature and extent of the training of the Temporary Employees.”

The judge noted that prior to farming out the important process to temporary workers, the department “undertook no effort to determine if the applications were in fact ‘complete and in compliance.’” That included failing to verify owners, officers and board members of the companies attempting to secure licenses worth tens of millions of dollars.

And if the applications filed didn’t match the department’s own established records, the lucky participants received no penalty. What’s more, Gonzalez said, the shortcut errors marred the intent of Ballot Question 2 (BQ2). Also known as the voters’ will.

“Given the lack of a robust investigative process for applicants, the requirement of the background check for each prospective owner, officer and board member as part of the application impedes an important public safety goal in BQ2,” the judge wrote. She ruled the regulations created were “unreasonable, inconsistent with BQ2 and outside of any discretion permitted to the (department.)”

Much of the fact-finding process was made possible by the speedy passage of SB 32, which beginning in late May enabled the production of previously confidential licensing information. The law not only clarified some of the current legal tangle, but also helped save the department’s credibility. That’s a good sign.

In a state with a painful history of licensing casino operators at a time the rest of the country was scandalized by the very idea, all Nevada officials should know the importance of protecting the regulatory credibility in a pariah industry. And, despite its growing popularity, legalized cannabis sales will always be shadowed as long as marijuana remains defined federally as a dangerous drug.

The good news is, the department has a real opportunity to get it right in the future. The preliminary injunction will play out. Perhaps a trial between warring parties will take place. Maybe not. We may even see a partial licensing do-over. Eventually, the dust of this issue will settle.

As long as nothing else emerges that damages the department, or shows even cozier relationships between state officials and industry insiders, all sides can walk away and call it a learning experience.

But talk about growing pains. This one will leave a mark.

And it should.

John L. Smith is an author and longtime columnist. He was born in Henderson and his family’s Nevada roots go back to 1881. His stories have appeared in Time, Readers Digest, The Daily Beast, Reuters, Ruralite and Desert Companion, among others. He also offers weekly commentary on Nevada Public Radio station KNPR. His newest book—a biography of iconic Nevada civil rights and political leader, Joe Neal—”Westside Slugger: Joe Neal’s Lifelong Fight for Social Justice” is published by University of Nevada Press and is available at Amazon.com. Contact him at jlnevadasmith@gmail.com. On Twitter: @jlnevadasmith

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