Arizona Cannabis Social Equity Program Faces Legal Challenge

A lawsuit against the Arizona Department of Health Services claims the state’s social equity program doesn’t meet the requirements outlined by the state’s cannabis legalization ballot measure, Proposition 207.

An Arizona nonprofit and a group of potential investors filed suit against the state’s cannabis social equity program last week, claiming its rules will lead to lucrative marijuana dispensary licenses intended for communities harmed by the War on Drugs being taken over by existing corporations.

The lawsuit brought by the Greater Phoenix Urban League and Acre 41, a group of women investors who hope to apply for a cannabis business license as social equity applicants, claims that the rules written by the Arizona Department of Health Services (ADHS) to govern the program fail to live up to the aims of Proposition 207, the cannabis legalization ballot measure passed by voters last year.

“The final rules promulgated by ADHS create what are functionally 26 ‘lottery tickets’ for qualifying individuals,” the complaint argues, “rather than a regime of continuing social equity ownership and operation.”

The suit names the State of Arizona, Gov. Doug Ducey, the Department of Health Services, and the agency’s director, Don Herrington, as defendants in the legal action. The lawsuit was filed on Thursday in Maricopa County Superior Court. The plaintiffs in the case want the court to declare the rules invalid and instruct the ADHS to write new regulations that conform with the intent of Proposition 207.

Proposition 207 requires regulators to encourage “ownership and operation” in the state’s new adult-use cannabis industry by members of communities disproportionately harmed by cannabis prohibition policies. In October, the ADHS issued its rules for the program, which sets aside 26 cannabis dispensary licenses for applicants who fulfill at least three of four criteria specified by the regulations. The health department plans to begin accepting applications later this year and award the licenses through a lottery early next year, although the suit seeks to delay further action until the case is decided by the court.

Arizona Plaintiffs Fear ‘Straw Man’ Applicants

Celestia Rodriguez of Acre 41, one of the plaintiffs in the suit, says that the rules could lead to big, existing cannabis companies using “straw men” applicants to apply for the licenses.

“My true intention is to make sure these 26 licenses stay with true social-equity licensees, as well as reinvest in and revitalize these neighborhoods that have been disproportionately affected,” Rodriguez explained to the Arizona Republic on Thursday.

She added that large cannabis companies have already started recruiting people who may qualify as co-applicants under the social equity program to form partnerships for the licenses, with the existing businesses guiding the complicated process and footing the $4,000 application fee.

“The (multi-state operators) have already been scouting the streets with flyers, mailers, and sending people door to door,” Rodriguez said. “They most definitely have been putting money into a hands-on approach to recruiting social-equity applicants.”

Once the social equity licenses are issued, Rodriquez says the corporate partners will try to take over control of the license.

“These [investors] are coming in, selling them the dream,” Rodriguez told the Phoenix New Times. “They want to buy them out for pennies, and add it to the portfolios that they are building right now.”

“The final rules promulgated by the ADHS permit owners who qualify under the Social Equity Program to enter an agreement to sell or transfer their ownership interest in the licensed entity at any point after the license is allocated, which defeats the purpose of the Social Equity Program,” the complaint filed in the lawsuit maintains.

Julie Gunnigle, attorney and political director at the National Organization for the Reform of Marijuana Laws of Arizona, says that activists expected large operators to vie for the social equity licenses, despite the intentions of the program.

“It’s just this giant industry grift that we all saw coming,” Gunnigle said.

“But what I didn’t anticipate,” Gunnigle continued, “was just how brazen these folks were going to be.”

The lawsuit cites other concerns the plaintiffs have with the social equity program rules, including only requiring ownership and not operation by a social equity applicant. The plaintiffs also argue that social equity businesses should be required to locate in areas impacted by cannabis prohibition and that applicants who lived in such areas as children but not recently should still qualify under the program.

Jimmy Cool, the lead attorney on the case, said that the social equity rules do not fulfill the intent of Proposition 207.

“What the voters were trying to do was enrich communities that were impacted by the drug war.” Cool said. “From our clients’ perspective, all [the program] does is enrich 26 people.”

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