Cannabis In NJ Can't Work Without Medical Marketplace Fix

Law360 (November 17, 2020, 1:52 PM EST) --
Michael McQueeny
Michael McQueeny
New Jersey's voters approved the state's adult-use cannabis referendum on Nov. 3, in overwhelming and unprecedented numbers, with roughly 67% of voters casting ballots in favor. With the public will on the side of the regulators, is New Jersey ready for legalization?

The short answer is no, not without an immediate and rapid expansion of the medical marketplace, which makes it substantially more likely that 2021 will be the year of greater opportunities in the medical marketplace, as opposed to adult use.

Importantly, continued focus on and expansion of New Jersey's medical marketplace is not irrelevant to the ultimate rollout and implementation of adult use. States and advocates often overlook that medical expansion is a critical recipe for the success of any adult-use marketplace. Remember, on top of creating new rules and regulations, New Jersey is largely still creating a new industry.

A robust and developed medical marketplace — at least one that has organically or anticipatorily grown with demand — is a crucial element of that success. New Jersey, however, has been saddled with a medical program, which, though designed with the best intentions for success, has nevertheless been slowed down due to unforeseen developments.  

Indeed, Gov. Phil Murphy had campaigned in 2017 on a promise of adult-use legalization, as well as an expanded medical program.

Following his election, and making good on the latter promise, the governor issued Executive Order No. 6 during his first month in office, designed to revamp a medical cannabis program that lingered under the prior administration, with limiting qualifying conditions, a dearth of available product, only five alternative treatment centers, and a population of barely 15,000 enrolled patients by 2018.

The executive order was designed to cut through any and all red tape associated with the medical cannabis program, and, importantly, cited to two states that the governor intended New Jersey to emulate, Michigan and Arizona. The message of the order was not lost on advocates, as these two states had a substantial patient population, totaling 2% of each state's total population. Murphy wanted an aggressive expansion of the program, and Executive Order No. 6 was the first catalyst in that charge.

To the state's credit — progress, at least initially, proceeded.

For instance, during the summer of 2018 the New Jersey Department of Health, or DOH, solicited six new vertically integrated licenses, which included some of the biggest and most reputable cannabis companies as stewards of this envisioned expansion. The licenses were approved in December 2018, thereby doubling the total number of licensed operators.

In the summer of 2019, Murphy signed a medical expansion bill named the Jake Honig Compassionate Use Medical Cannabis Act, providing for, among other things, a host of new classes of licenses, a departure from mandatory vertical integration, greater social justice, equity and inclusion, and a statutory infrastructure designed to scale up with the governor's goal of accomplishing a medical marketplace of up to 2% of New Jersey's total population.

Simultaneously, in the 2019 request for applications, or RFA, the DOH solicited 24 new licenses, including four vertically integrated, five cultivation and 15 dispensary.[1]

Also in 2019, the DOH issued its biennial report, which further projected anticipated growth over the following two years.[2] For instance, the report looked at statewide metrics and compared them to other states' medical cannabis programs. Based on that, the DOH made projections for the rate at which New Jersey's medical cannabis program should and must expand.

Therein, the DOH projected that by January 2021, the state program would likely have an anticipated patient population of 98,000 patients, thereby necessitating 337,914 square feet of cultivation canopy, and between 50 and 70 operational dispensaries to meet that patient demand. Moreover, the 2019 request for applications and continued patient enrollment made all these goals not only reasonable, but also more than likely to occur.  

However, the expectations that such a burgeoning marketplace brings with it unfortunately created certain unforeseen byproducts, the greatest threat of which included crippling and debilitating litigation.

In particular, in November 2019, a dozen or so of the 196 applications submitted in response to the 2019 RFA were disqualified based on certain technical issues associated with mandatory information required to be submitted to the DOH as part of the application process.

Several of these disqualified entities challenged the disqualification, and were successful in obtaining a stay[3] from the Superior Court of New Jersey's Appellate Division thereby preventing the DOH from undertaking any further action on the 2019 RFA, i.e., the DOH could no longer review, score or, most importantly, announce the 24 winners of the 2019 RFA. Similarly, what was initially anticipated to be a limited stay on a fast-tracked review before the Appellate Division has since languished and continues to remain in limbo awaiting oral argument before the Appellate Division.

The net effect of the appellate stay has been an unfortunate, inequitable and unequivocal bottleneck handcuffing the ability of the DOH to scale the program to correspond with increasing and explosive patient demand. Indeed, New Jersey will far surpass the patient enrollment estimation identified in the biennial report, and will easily surpass 100,000 total patients by January 2021.

However, the state only has 12 active dispensaries and roughly 210,000 square feet of canopy, as compared with the 50 to 70 dispensaries and more than 330,000 square feet of canopy necessary to meet the stated patient demand.

But again, this does not just affect the medical marketplace, but will cause a ripple effect also hampering the rollout of the adult-use marketplace. The most recent public draft of the proposed adult-use enabling legislation, S.21,[4] does anticipate grandfathering in the current medical alternative treatment centers into the adult-use marketplace, subject to a crucial condition precedent.

In particular, in order for alternative treatment centers to receive authorization to sell into the adult-use marketplace, they must certify that they have sufficient quantities of medical cannabis available to meet the reasonably anticipated needs of the existing medical marketplace.

Whereas the Legislature was hopeful that the alternative treatment centers could immediately "flip the switch" and begin production and sales to meet adult-use demand, Jeff Brown, an assistant commissioner with the DOH nominated to be the executive director of the to-be-created Cannabis Regulatory Commission, or CRC, was quick to point out that several alternative treatment centers "literally do not even have the space to accommodate the level of demand that personal-use sales would bring."[5]

But why doesn't New Jersey just solicit independent adult-use cannabis licenses? Well, the short answer is that this brings with it a separate and independent delay. For instance, S.21 envisions that the CRC would need at least six months to develop the rules and regulations governing the adult-use marketplace, and, only at that point could the CRC start soliciting adult-use licenses.

These licenses take roughly 90 days to review, assess and ultimately approve through the regular competitive process, and only at that point could those newly awarded licenses start building out their licensed facilities. Again, it is important to remember that cannabis is an agricultural commodity, and businesses do not have the ability to just turn on the lights and start selling, as it takes time to grow, process and, only then, sell.

As a result, we are far more likely — and indeed, it is far more necessary — to see the DOH and/or CRC solicit several dozen licenses for the medical program well before any adult-use licenses are sought.

While 2021, at first glance, seemed likely to be the year of adult-use cannabis in New Jersey, in reality, it is much more likely to be the year of true medical expansion. Why? First, and most importantly, because we need it. The number of licenses has not caught up with the rate of patients enrolling in the program, due, in large part, to the stay ordered by the Appellate Division in connection with the 2019 RFA.

But once that bottleneck clears, and the Appellate Division finally makes a ruling, nothing will preclude the DOH — or as the program transitions, the CRC — from soliciting new licenses. Remember, the Jake Honig Act vests both the DOH — and, once transitioned, the CRC — with the discretion to solicit as many licenses as it sees fit to meet the needs of the medical marketplace.

That discretion, predicated upon the numbers and assumptions built into the biennial report, is already abundantly paramount. Thus, once the stay on the 2019 RFA is extinguished, the state will still have the need — on medical alone — to begin soliciting an additional 20 to 40 dispensary licenses, and at least another 100,000 square feet of canopy. And remember, these numbers are just to meet the demand of 100,000 total patients, whereas the program will continue to grow by leaps and bounds throughout 2021 and beyond.

Under no circumstances can New Jersey allow the implementation of the adult-use program without first protecting and ensuring the interests and needs of patients in the medical marketplace. Moreover, given that the Legislature expressly envisions the current alternative treatment centers serving as the first wave of licenses selling into the adult-use marketplace, the bottleneck on licenses must be alleviated.

This can and will happen, the only question is how long the litigation before the Appellate Division continues to stall that progress. Whereas the hope is that this will be sooner rather than later, even the prospect of sooner is little solace to the patients and a program that is clamoring for growth.   

Michael McQueeny is counsel at Foley Hoag LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.






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