N.Y. Ruling Puts Adult-Use Program On Shaky Ground

New York experienced two remarkable incidents last week: a near catastrophic legal earthquake on Wednesday, and then an actual 4.8 seismic event on Friday. The latter event swayed buildings and rattled a few east coast nerves, but it was the Wednesday event, courtesy of a court Order by Judge Kevin R. Bryant, that was felt throughout the state and the cannabis community nationwide until it was remedied in an amended Order by Judge Bryant the following day. The judge’s decision will surely also have a greater impact on New York than the rare geologic event, which will be forgotten by next week. Not so the amended ruling, which – as much as it corrected a mistake and prevented a meltdown – also arguable left New York’s adult-use regulatory program in a far more precarious state going forward than it was before the ruling.

To recap briefly, Judge Bryant’s Wednesday filing in Leafly Holdings v. New York State OCM, in which Leafly sued the regulator over a provision in the regulations that, simply put, prevented it from doing business in the state, not only found for the plaintiffs but also issued an order that invalidated whole sections of the state’s adult-use program, including “…Parts 118 through 121, 123 through 125, and 131 of Chapter II of Title 9 of the Official Compilation of Codes, Rules, and Regulations governing the adult-use cannabis market are hereby declared unlawful and void as arbitrary and capricious.”

The next day, Judge Bryant issued the aforementioned amended ruling, replacing his original sweeping order with precise instructions, as follows: “…the following sections are hereby declared null and void as arbitrary and capricious; The Third-Party Marketing Ban, Parts 9 N.Y.C.R.R. §123.10(g)(21) and l24.5(a); the Pricing Ban, 9 N.Y.C.R.R. §124.1(b)(5)(ii); the Third-Party Order Ban, 9 N.Y.C.R.R. §123.10(g)(23); the Third-Party All-Licensee Listing Mandate, 9 N.Y.C.R.R. §12a.l(b)(2); and the Third-Party Distributor Listing Mandate, 9 N.Y.C.R.R. §12a.1(c)(l)-(2)”

The following sentence in that paragraph remained the same in both versions: “Moreover, insofar as argued by Petitioners, based on the record before the court, it is the finding of this Court that the aforementioned regulations constitute impermissible restrictions on Petitioners right to free speech and that they are unconstitutionally vague.”

Bryant, of course, is the same judge who temporarily halted New York’s adult-use program in its tracks in a lawsuit attacking the program on constitutional grounds. In that case, as in this one, he was not subtle in his excoriation of the OCM’s justification for the underlying regulations and the state’s defense of them in court. The upshot for observers, even before Judge Bryant revised his original ruling, was that his visceral critique had damaged the state’s adult-use program, and that further lawsuits against the OCM and the CCB, and perhaps individual regulators, would be the inevitable result.

The question then is how current and prospective operators are expected to react to these events, and also how the lawyers who counsel them will respond to what has become a byzantine and unpredictable licensing process. To gain some insight on the question, Cannabis Business Executive spoke Friday with Robert M. DiPisa of Cole Schotz, a cannabis attorney who has certainly experienced last week’s roller-coaster of emotions along with his clients.

Wednesday really set off panic alarms, and then it was followed by relief on Thursday with the narrow decision,” said DiPisa. “But it has still called [the program] into question, and just because the decision was narrowed from Wednesday to Thursday doesn’t mean that those other regulations are not still vulnerable to challenge and are likely to be challenged sometime in the near future. So, how do we plan for that, and how do we try to be even more nimble than we are already trying to be, so that if there are regs that do become void or are changed, we can shift to ensure compliance without breaking the bank?”

Regarding the Wednesday Order, DiPisa added, “It was very clear that the judge’s original ruling painted some really broad brushstrokes when it comes to what he decided to void, many of which were outside of the scope of what he was adjudicating. For instance, what was most concerning to me on Wednesday was the fact that he voided the section with respect to the rules and regulations regarding applications and licensing. From my perspective, if that’s been voided by the judge, what does that mean for all of the operators who received licenses pursuant to those rules and regs?”

The similarity to Judge Bryant’s last go-round with OCM is too glaring to ignore. “It was very reminiscent of what was happened last spring and over the summer with the potential voiding of the current license program,” said DiPisa. “And it led to some immediate hysteria and zero direction from the OCM as to if you’re operating, what does that mean? Is your license no longer valid or void. So, it was a bit of a heart attack and then it subsided a little bit on Thursday, when the scope was narrowed to what was actually at issue with respect to marketing and advertising.

“The thing is,” he continued, “it makes complete sense to me, especially in a market like New York, to permit an operator such as Leafly to operate within that jurisdiction, which has a very high number of illicit shops that are indistinguishable from license shops. From the viewpoint of a tourist or a consumer who may not be as educated as they should be about where they’re purchasing cannabis, Leafly is a great website that directs consumers to licensed dispensaries within New York. So, shouldn’t that be something we would want, especially in a jurisdiction like this?”

The opposing argument was that Leafly would take business away from New York-based advertisers. “As to the harm,” said DiPisa, “I kind of agree with the judge that the only way that Leafly is going to provide that type of service – mapping out all dispensaries, showing their hours of operation, – is [if they have] some kind of revenue source to offset the costs associated with providing that service, and just like many other websites, they do it by way of advertising?

“So, doesn’t it make sense to permit the operators within New York to advertise on the Leafly website when people are searching where to go in New York, and they can advertise sales so that they could potentially get more direct consumers to their particular shops,” he added. “Where’s the harm in that, especially in the New York market? I view it as more of a benefit to have a company like Leafly in that marketplace, to direct consumers to where they should be going and not to the illicit operators where they’re going to be purchasing unregulated and untested products.”

The judge’s decision remained the same in both versions, with only the order swapped out, and it did seem as though something about these cases really upset him. “It is similar to the CAURD lawsuit,” responded DiPisa, “where from my perspective the judge didn’t seem shy about his opinion as to how the OCM handled that lawsuit.”

Judge Bryant seemed to be undressing the OCM in public, concluding that there’s no discernible foundation for the regulations. As a result, some people were immediately arguing that he set the stage for more lawsuits. “I don’t disagree with that at all,” said DiPisa. “As I’ve said previously, I think it’s naive to think that this is the end, and that there aren’t going to be more lawsuits, and that the lawsuits in the New York market are not going to be continuous. The concern I have with that is that we have existing license holders and operators who are making financial decisions based upon the current regulations to ensure compliance with those regs, and if you know that there are going to be ongoing obstacles where these regulations are going to be voided or altered and changed, and then you are going to have to make even more of a financial investment in shifting and altering your operations to comply with these continuously changing regulations, all that leads to is more expense and cost for operators, who are already spread thin.

“So, that’s my concern,” he reiterated. “How, as an operator, can you proceed confidently with making financial investments and decisions based on regulations that you know are on shaky ground, can be deemed void, and changed in the very near future?”

In the same vein, how are operators expected to have confidence in the regulators when the court doesn’t have any confidence in them or their regulations? “I don’t think that we do have confidence,” said DiPisa, “and what’s even more concerning is that if there are revised regulations that are going to come out, the timetable for those to come out will be significantly extended. You know why? Because the OCM knows that they are under fire here, and if they are coming out with any future promulgation, it would behoove them to go through them with a fine-tooth comb and get internal challenges, knowing that they are going to be scrutinized heavily once they come out.

“What is that going to lead to,” he added rhetorically. “More bureaucracy, more time for any revised regulations to come out, and more time that these operators are going to be left in limbo if any rules and regs get voided or changed or revised. It just leads to more and more uncertainty in the New York market. And in the time period since New York opened, I don’t feel like we’re seeing a high volume of new dispensaries. More licensed operators are opening, but I don’t think we’re seeing real saturation in the market to the point where we can start to stifle the illicit operators. And does the uncertainty that we’re seeing in the New York market deter out-of-state or potential operators within the state from even entering the market until all of this shakes out? I don’t know.”

So, did this judge throw down a gauntlet, issue a warning, to the regulators last week?  “Or a potential roadmap to those looking to challenge the regs with the ones that he struck down,” responded DiPisa. “The Wednesday’s decision said, ‘I’m deeming these as void, arbitrary, and capricious,’ and then he had to pull it back on Thursday, to say, ‘You know what, it’s only this section. “So, my concern is that the judge has opened Pandora’s Box by putting out a roadmap for potential plaintiffs to follow if they are seeking to challenge those particular sections of the regulations. That’s my concern.”

I had already toyed with putting “Pandora’s Box” in the headline or perhaps going with the “Emperor Wears No Clothes” theme. They both seemed so apt. “There have been quite a few stutter steps in this New York market,” remarked DiPisa. “Back in 2018, people were looking at New York and New Jersey as almost a competition to see which state was going to flip first. And there were all these concerns about the New York market because it’s a mecca, so many different industries, and the viewpoint was, New York is going to be the [cannabis] market, where we’re going to see the innovation, and New Jersey will be overshadowed even if the rollouts happen concurrently, because people are going to choose New York over New Jersey.

“But when you look at the two markets now,” he added, “and how New York has floundered compared to New Jersey – which not only got open and operational before them, but has been nowhere near as bad in terms of lawsuits – if you had come to me in 2018 and said this is what it’s going to look like in 2024, I wouldn’t have believed it.”

Counseling in Chaos

For cannabis attorneys in New York, does all of this uncertainty this make their jobs harder? Do you have to be that much more on top of everything that’s happening going forward? “It definitely makes the job harder,” said DiPisa. “One of the hardest parts of this job, and one of your tasks as an attorney, is to review and interpret the regulations for your clients when they come to you with questions or decisions that have to be made. But not all regulations are clear, and that’s every jurisdiction, so you have to look into it, you speak to the regulatory body to get their thoughts and interpretation, and you advise the client accordingly.

“What is so much more challenging,” he added, “is the fact that we’re having to go through that process and those steps to interpret the regs and advise our client based on those, but now we have in the back of our head that at any point in time, these regulations – especially those that the judge specifically pointed out – can be deemed void, and or revised. So, how can you prepare your client to be ready for a shift when you have no idea what that shift is going to look like, or what those future revised regulations will look like?

It’s a black box, and it’s almost impossible to advise the client on a black box when you don’t know what the language says or will say,” he continued. “So, what you try to do is to comply with what you have now. But to be honest, you don’t make a significant financial investment. If you have to make a serious decision based on these regs, knowing that they could shift, you have to keep a close eye on every single dollar, because things shift quickly, and it could result in some significant financial impacts for you. So, what we do is we don’t over commit on what we have in front of us right now, because we know it’s subject to change.”

Would that be in specific areas that carry a greater risk than others? For instance, don’t sign that lease or commit to a loan just yet? “It’s interesting that you say that about not signing the lease yet,” replied DiPisa. “If you’ve already applied, and you’ve already received the license, a lot of times that’s the contingency, and once you receive the license, the lease goes hard. And one of the sections that was voided in the Wednesday ruling was the section that talks about municipalities and their control in the industry. In New York, municipalities have a say over where certain retail operations can go or about onsite consumption, and a lot of the decisions about where your dispensary [can be] located are based on the areas that are zoned for retail or onsite consumption, so this is where you have to be [located] in the future.

“If that section is voided and you can set up your operation anywhere,” he added, “including someplace that is much more suitable and conducive for your use, wouldn’t you feel like you missed out if you played by the rules, selected a property that maybe wasn’t best for you, but that’s where you were permitted to be, and then a year later that particular regulation is thrown out the window, and someone who comes into the market has their choice of where they want to set up their dispensary or their onsite consumption, and it’s downtown main street, where you have the foot traffic, unlike the operators who played by the rules, only to have their retail and onsite consumption buried in some industrial zone off the beaten path?”

Will that require being extra communicative with the OCM going forward? “We’re usually like that already,” said DiPisa. “If the regs are unclear, we always interpreted it and feel like we have a good handle on what it says. But because I can’t guess what someone else is thinking, I always try to check with the regulatory body to see how they interpret it, to essentially confirm it before I go back to my client and make a decision. Sometimes you get a response in a timely manner, sometimes you don’t, and sometimes you never get a response. I’ve emailed regulatory bodies to point out a clear conflict between language and regulation, and never got a response.”

I had to admit that it seemed like a situation that could easily induce panic, which no wants to see in their lawyer. The sky isn’t falling, but how does one maintain a sense of control when the way forward is so much cloudier than it is supposed to be?

“Here’s the thing,” responded DiPisa. “Our job is always to make the most informed decisions that we can make anytime you make a choice. The key is to not make a choice without laying out all the possibilities, all the options, and making an informed decision. The way I view the decision on Wednesday, and then the revised decision on Thursday, is that this is just another bucket that we put in front of ourselves before we make a decision. It’s just another cog in the wheel when you’re making a choice, particularly on the rules and regulations that the judge deemed as voidable. You always keep in the back of your mind that this was one of the sections that was called out as being potentially void, so that when we make this choice we know that sometime in the future this particular rule or regulation may be modified or deemed void.

“So, we hedge the risk from a financial perspective, and we do not over commit to this decision,” he added. “But I don’t think that you can panic, or be frozen, or stand in place and not make a decision, not move, not operate, not do anything. Because that leads to certain failure. You have to make a decision, but it has to be an informed decision, and this is just one more piece of information that we need to keep in mind when making those difficult decisions, and that’s really how I view it.”

Had he ever been through anything like this before? “No,” he said decisively. “Not until I started working in cannabis have I seen anything like what we’re seeing now? We’ve always dealt with amended rules and regulations, but they usually come up on an annual or semiannual basis, and depending on the jurisdiction, you get draft regs, which almost gives you like a heads-up about what’s coming. But I haven’t seen a jurisdiction take hits like this on the regs within such a short period of time as New York has. But there’s always a first for everything, and in cannabis, you have to know that nothing is off the table, and anything can happen.”

Of course, it could also simply be what happens whenever you play in the Big Apple. “Is New York just the lightning rod because it is such a mecca, and there’s so much focus on it,” mused DiPisa. “I think a lot of out-of-state and multi-state operators want to plant their flag in the ground in New York City because they feel they have to. Just like any industry, this is about the brands, and maybe the fact that there’s so much focus on New York because it’s a must for your brand is also why we’re seeing so much more activity, and challenges, there than in other jurisdictions.”