“What legal authority do you have to say, 'Please pay me $5,000 to consider this?'”
Searchlight by John Hult, South Dakota
A Rapid City medical marijuana dispensary is seeking help from the state Supreme Court to obtain a license for another location.
The state Department of Health is asking businesses to pay an additional $5,000 fee and complete the application again. The ministry also argues that the companies should have taken the dispute to an administrative hearing before asserting their case in court.
The state high court heard arguments on the issue last week at the University of South Dakota Knudson School of Law in Vermilion.
The health department has appealed a circuit court ruling in favor of Puffy's, which operates two pharmacies in Rapid City and hopes to open six more. Puffy's also has a pharmacy in Sturgis.
Rapid City medical pot rules allow for 15 dispensaries. However, the city received 47 applications for these slots in 2021.
The health department stepped in to help the city determine which businesses would receive licenses through a lottery system. This is a framework written into state law in case the number of dispensary applications exceeds the number of dispensaries allowed by local governments.
It happened in three jurisdictions in 2021: Yankton, North Sioux City and Rapid City.
Puffy won seven of Rapid City's 15 licenses through a lottery.
According to the ministry's regulations regarding the lottery system, licensed businesses must start operations within one year. If not, the license will be passed on to the next company.
In the case that ultimately led to last week's hearing in Vermilion, Rapid City's 15th license went to a company called Greenlight Dispensary, but the company did not use it within a year.
One of Puffy's applications was number 16.
But at that point, more than a year after the lottery, instead of giving Puffy another license, the health department told the company he was free to reapply.
The owner didn't appreciate it. To participate in the drawing, applicants must pay a non-refundable fee of $5,310 and comply with state medical marijuana regulations. The department not only required Puffy's to recertify its compliance with state law, but also required it to pay an additional $5,310 in fees for each license in 2021.
The company sued the state, asking a judge to force it to surrender the license to the state without an application and without additional fees. The company won. The state appealed.
Department of Health: We need flexibility
Howard Pallotta was one of two attorneys representing the health department last week. He said Puffy's had failed to “exhaust all administrative remedies” before filing suit last year.
Pallotta said Puffy's should have paid the application fee, completed another round of paperwork, and challenged the fairness of the department's decision at an administrative hearing.
Such hearings are conducted by lawyers who decide disputes over administrative regulations. The loser of such a dispute can file a lawsuit to have the decision reversed.
Judge Patricia Devaney was among the judges who pressed Pallotta on this point. Don't state regulations state that the next operator should get a license in this situation?
“Should they have just filed a protest application and reserved the right to discuss it later?” Devaney asked.
That would have been appropriate, Pallotta said. By the time Puffy's filed suit demanding the license, 19 months had passed, Pallotta said. Since the license is valid for one year, it is “logical and reasonable” to expect Puffy's to pay the fee and recertify its compliance with state law, he said.
Pallotta said companies with licenses would have to pay the fee again every year, and “a lot could have changed in 19 months.”
But the judges questioned that logic, considering the Puffies had not renewed their licenses. We have never obtained a license for the location in question.
Chief Justice Stephen Jensen asked, “What legal authority do you have to say, 'Pay me $5,000 to consider this?'”
Tamara Lee, an attorney for the state, said in a rebuttal that the fee is an annual fee and there is no guarantee that any company will participate in the lottery. But Judge Mark Salter answered Jensen's question: How can a company charge an annual fee to renew a license it never had?
“Is there no independent authority that can demand payment of fees, yes or no?'' Salter asked.
Lee acknowledged that the department does not have such authority, but argued that authority is implied by the “totality” and regulatory emphasis of the state's cannabis laws.
“We're talking about Schedule I controlled substances,” Lee said, referring to the federal drug category to which marijuana falls.
Schedule I controlled substances are substances that have no medical use and have a high potential for addiction. The federal government is currently considering rescheduling cannabis. South Dakota voters approved medical marijuana in the state in 2020, and this year there is a measure on the Nov. 5 ballot to legalize recreational marijuana.
Puffies: If the rule is valid, we will enforce it.
Puffy's attorney, Ryan Quach, personally faced the judge's rapid-fire questioning.
Part of the reason is what happened with the company's other pot licenses. Like Greenlight Dispensary, Puffy's was unable to open all of its stores within a year of winning its license in the lottery.
Greenlight sought an extension but was denied and did not appeal the denial. Puffy's also sought an extension of its unused license, which was also denied, and filed a lawsuit over this.
In this case, Puffy's argued that the rule was unconstitutional because it treated businesses differently based on their location. Dispensaries operating in cities with a limited number of dispensaries must participate in a lottery. Those who operate in cities without restrictions are not.
In that case, Puffy's was seeking a court order to issue a “writ of prohibition” to prevent authorities from enforcing the rules. However, the judge dismissed the case without addressing the question of constitutionality. Instead, he ordered Puffy's to file a lawsuit seeking an extension of the administrative hearing. That hearing is pending.
The lawsuit that prompted last week's hearing in Vermilion was filed separately. In it, Puffy's requested and received a “warrant of orders.” This is a court order that requires a government agency to enforce a rule, in this case a rule that says the next business to get a license. Puffy's demanded it while continuing to argue that the rule was unconstitutional.
The justices noted this disconnect during a hearing last week at the law school. If you think the rules are unconstitutional, why would you ask us to enforce them?
Kwach said the high court should decide on constitutionality because it needs to be answered and the Supreme Court has the power to do so.
He said if a judge decides the rules are constitutional, he should force the health department to follow them.
But why, the justices asked, would Puffy's pay the fee, resubmit the application and argue in an administrative hearing whether the agency violated its own rules?
“I think this is unfair because while everyone else has to pay an initial license fee of $5,350, my client is effectively being asked to pay $10,620. ” Cwach said.
The judge is scheduled to issue an opinion at a later date.
This article was first published by South Dakota Searchlight.
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