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LA Phase 3 Update: DCR Has Authority to Process Invoiced Applicants

Posted by Meital Manzuri, Esq. | Mar 09, 2020 | 0 Comments

Letter

Last week, ahead of the March 5th Cannabis Regulation Commission hearing, our office sent a letter to the City of Los Angeles describing the irreparable harm invoiced Phase 3 Round 1 Applicants are suffering and proposing legally viable solutions. The letter was sent to:

DCR / Cannabis Regulation Commission / Rules, Elections and Intergovernmental Relations Committee / City Attorney's Office / Office of the Mayor.  

Read the full letter below. To send to your Councilmember, download the PDF version below. 

March 5, 2020

To: City of Los Angeles

Attn: Department of Cannabis Regulation, Executive Team & Licensing Team

Attn: Cannabis Regulation Commission

Attn: Honorable Members of the Rules, Elections and Intergovernmental Relations Committee

Attn: City Attorney's Office 

Attn: Mayor Eric Garcetti's Office

Re: Temporary Approval for Invoiced Phase 3 Retail Round 1 Social Equity Applicants 

Dear Esteemed Representatives of the City of Los Angeles:

Thank you for your leadership on cannabis issues in the City and for your consideration of the contents of this letter.  We hereby submit this letter on behalf of our clients and the Cannabis Equity Retailer Association (CERA) which was established to support the Social Equity Program's success and to represent the 100 Social Equity Applicants who were deemed eligible for further processing under the City's Phase 3 Retail Round 1 (“Round 1”) Application Process.  In accordance with Los Angeles Municipal Code (LAMC) Section 104.06.1(c), these pre-vetted Social Equity Applicants (“Invoiced Round 1 Applicants”) secured storefront properties, submitted applications and timely paid their $9,075 invoices issued by the Department of Cannabis Regulation (“DCR”), which means the City has received nearly $1 Million from Invoiced Round 1 Applicants thus far.  Naturally, these invoices were understood to be the first major step towards receiving a cannabis retail license, however Invoiced Round 1 Applicants have still yet to be allowed to make any progress towards applying for State Licensure or opening their stores in the 6+ months since they applied on September 3, 2019.  

In light of the above, the purpose of this letter is three-fold.  First, to inform the City of the severe financial harm being suffered by Invoiced Round 1 Applicants due to the City's repeated delays.  Secondly, to seek action by the City Council to amend the Ordinance to allow DCR the ability to issue Temporary Approval to Invoiced Round 1 Applicants after the conclusion of the audit.  And lastly, to urge DCR to exercise its administrative rule-making authority immediately, with the Mayor's approval, to issue local authorization to Invoiced Round 1 Applicants.  

The above proposals will provide much-needed relief for Invoiced Round 1 Applicants and they can be implemented while the audit is ongoing, thus balancing the interests of Invoiced Round 1 Applicants with the City's paramount goals of ensuring the integrity and transparency of the Round 1 Application Process.  As will be bourne out below, if the City fails to act, many of the intended beneficiaries of the Social Equity Program will literally become bankrupted by a program that promised them economic opportunity.   

A. Invoiced Round 1 Applicants Are Suffering Extreme Financial Hardship as a Result of the City's Delays in Granting Temporary Approval

While we recognize and appreciate the need for an audit of the Round 1 application process to take place, we feel it is critical to inform the City of the irreparable economic harm that the Invoiced Round 1 Applicants are suffering as a result of repeated delays in the process.  We appreciate the Commission and the DCR working together to put forth proposals to City Council and the Mayor's office and hope the REIG Committee will resume hearing cannabis matters and show the stakeholders that the City still considers the Social Equity Program a priority.

Attached herein, as Exhibit A, is an economic analysis that was prepared by CERA for the City's review and consideration. Therein, CERA conducted an independent investigation into the ongoing impact of the City's delay on cannabis licensing for its Invoiced Round 1 Applicant members.  As shown in Exhibit A, Invoiced Round 1 Applicants have spent an alarming amount of approx. $10 Million (aggregate) on rent and real estate holding fees over the past six (6) months.   As these delays continue, Invoiced Round 1 Applicants will be forced to continue paying millions of dollars monthly for unused real estate. Now, faced with the uncertainty of the process and the ongoing audit, investors are beginning to abandon their Social Equity partners and Invoiced Round 1 Applicants are running out of time and money. As a result, many Invoiced Round 1 Applicants are beginning to seriously doubt their ability to continue holding onto property for an indefinite period of time.  We anticipate that as the delays continue month-to-month, we will see an increasing number of Invoiced Round 1 Applicants lose their properties. Accordingly, if the City continues to allow delays, Social Equity Applicants will be faced with the very real threat of being bankrupted and losing their business. 

B. City Council Should Move to Amend the Ordinance to Allow DCR the Ability to Issue Temporary Approval to Invoiced Round 1 Applicants. 

At the February 6, 2020 meeting of the Cannabis Regulation Commission (the “Commission”), DCR Executive Director Cat Packer noted that “current law does not provide a mechanism for [Invoiced Round 1 Applicants] to receive Temporary Approval.” Under the current Ordinance, Invoiced Round 1 Applicants would have to go through the full annual licensing process in order to become operational.  (See, LAMC § 104.06.) 

We strongly urge City Council to amend the Ordinance to allow DCR the ability to issue Temporary Approval to Invoiced Round 1 Applicants.  Given the fact that the Ordinance was previously amended in November 2018 to give DCR the ability to issue Temporary Approval to Phase 2 Non-Retailers (the majority of which were not even Tier 1 or Tier 2 Social Equity Applicants), it would defy logic and reason to deny this same relief to Invoiced Round 1 Applicants.  Indeed, the goals of the Social Equity Program would hardly be advanced if the City drove low-income Invoiced Round 1 Applicants into further debt by forcing them to continue holding property (without the ability to operate) throughout the entire duration of the City's lengthy annual licensing process. (For reference purposes as to timing, Phase 1 opened over two years ago in January 2018 for Existing Medical Marijuana Dispensaries (EMMD) and DCR has still yet to issue a single annual license to an EMMD.) Because the City's licensing process is at a complete standstill anyways due to the ongoing audit, the operative provisions of the Ordinance amendment would not trigger until after the completion of the audit.   

Accordingly, we respectfully request that LAMC Section 104.06(a) be amended as indicated in italics below: 

Storefront Retailer Commercial Cannabis Activity.  With respect to an application for a License for Storefront Retailer Commercial Cannabis Activity or for Microbusiness Commercial Cannabis Activity that includes Storefront Retailer Commercial Cannabis Activity, DCR shall either deny the issuance of the License with no hearing at any time during application processing or, within 60 days of the date DCR deems the application and pre-licensing inspection complete, make a recommendation to the Commission to issue the License.  An Applicant who applies for a License under this subsection (a) and who is eligible for further processing in Round 1 as determined by DCR under Section 104.06.1(c) shall receive a Temporary Approval to engage in Storefront Retailer Commercial Cannabis Activity at its Business Premises pending the review of its License Application. If DCR recommends issuance of a License, DCR, at its discretion, may issue the Applicant a Temporary Approval to engage in Storefront Retailer Commercial Cannabis Activity at its Business Premises.  DCR shall revoke the Temporary Approval if the DCR denies the issuance of the License or if the Commission denies issuance of a License. 

C. Even in the Absence of an Ordinance Amendment  by City Council, DCR Has the Authority to Issue Local Authorization to the Invoiced Round 1 Applicants, With the Mayor's Approval 

DCR is an administrative agency vested with all the “powers, duties and responsibilities” set forth in the Los Angeles Administrative Code (LACC) and elsewhere in the City Charter and the LAMC.  (LACC § 22.1130.) In light of DCR's administrative authority, we urge DCR to immediately promulgate a rule that allows for Invoiced Round 1 Applicants to receive local authorization to apply for a state provisional license -- again, one of the same benefits that was previously afforded to Phase 2 Non-Retailers.

While it is true that DCR is required to administer the Rules and Regulations adopted by the City Council, it is also equally true that DCR may promulgate and enforce its own Rules and Regulations related to the City's Cannabis Procedures. (LAMC § 104.16.)  Those Rules and Regulations, when adopted by order of DCR's Executive Director, are subject only to the approval of the Mayor.   (See, Charter § 506; LAAC § 21.1.)  

DCR's functions as an administrative agency are very different from that of the legislative branch of government.  (See, Charter § 2.1 [stating that all legislative power of the City is vested in the City Council]; California Radioactive Materials Management Form v. Department of Health Services (1993) 15 Cal. App. 4th 841, 869-970.)  The California Supreme Court succinctly described the differences in the function of these two branches of government, stating

“It is the function of the Legislature to declare a policy and fix the primary standard. To promote the purposes of the Legislation and carry it into effect, the authorized administration or ministerial officer may fill up the details by prescribing administrative rules and regulations.” (Knudsen Creamery Co. v. Brock (1951) 37 Cal.2d 485, 492.)  

Thus, the legislative branch declares public policy and makes provisions for the ways and means of accomplishing policies, while carrying out those declared policies is a function of the administrative branch. (California Radioactive Materials Management Forum v. Department of Health Services, 15 Cal.App.4th at 870, 872.)

Here, a DCR rule allowing for the issuance of local authorization to Invoiced Round 1 Applicants would not constitute a policy change (and thus a legislative act) because the local authorizations would be non-operational in nature, just as they were for Phase 2 Non-Retailers.  Moreover, DCR's granting of local authorization to Invoiced Round 1 Applicants would actually carry out the Social Equity policies declared by City Council and carry them into effect. (See, Knudsen Creamery Co., supra, 37 Cal.2d at 492.)  For instance, LAMC Section 104.00 specifically provides that the purposes of the Social Equity Program are to:

  • “to promot[e] equitable ownership ….opportunities in the Cannabis industry;” 
  • “to decrease disparities in life outcomes for marginalized communities and to address disproportionate impacts of Cannabis prohibition in adversely-impacted and lower income communities;” 
  • “to issue licenses in an orderly and transparent manner to eligible applicants;” and 
  • “to mitigate the negative impacts brought by unregulated Cannabis businesses.”  

(LAMC § 104.00.)   

Because the grant of local authorization to Invoiced Round 1 Applicants would further all of the above declared policies (see, Exhibit A), the promulgation of such a rule would fall within DCR's rule-making authority so long as it is approved by the Mayor. (See, LAMC § 104.16; Charter § 506; LAAC § 21.1; Knudsen Creamery Co., supra, 37 Cal.2d at 492.)  And to be clear, local authorization would not vest Invoiced Round 1 Applicants with the right to operate at their Business Premises while the audit is pending or while their license is under review --  Invoiced Round 1 Applicants would merely be allowed to apply for a state provisional license from the California Bureau of Cannabis Control (the “BCC”).  If the audit findings show errors in the Round 1 process that require an overhaul of Round 1, then the City could just deny Temporary Approval.  This small concession by the City would make Round 1 investors less likely to abandon their Social Equity partners due to timeline uncertainty and would significantly lessen the downtime for Invoiced Round 1 Applicants to become operational.  By issuing local authorization, we estimate that Invoiced Round 1 Applicants would be relieved of approximately 3 to 4 months of unnecessary downtime.

Accordingly, we respectfully request that DCR promulgate the following regulation with the Mayor's approval:

Regulation No. 14 Local Authorization for Round 1 Applicants.  

If DCR determines that an Applicant is eligible for further processing in Round 1 under Section 104.06.1(c), DCR shall provide the Applicant with local authorization to apply for a provisional license from the Bureau of Cannabis Control.  This local authorization shall not permit an Applicant to engage in commercial cannabis activities unless DCR grants the Applicant a Temporary Approval.

D. Summary. 

It would be no exaggeration to say that the entire Social Equity Program is currently at stake.  The City should not continue to victimize the Invoiced Round 1 Applicants who are not responsible in any way for the flaws in the City's application process.  While we understand that Round 1 is currently under audit, it is uncertain as to timeline for the final results, and we can probably agree that, thereafter, it will take the City some time to propose and implement appropriate policy changes if applicable.  Accordingly, in consideration of the fact that these are Social Equity applicants that will be left without proper remedy if this process is delayed any further, we urge DCR and the Mayor's office to make it a priority to promulgate the necessary Rule to issue local authorization to the Invoiced Round 1 Applicants.  Moreover, we hereby request the Commission to urge the City Council to put forth a proper motion before the REIG Committee to amend the ordinance and allow Invoiced Round 1 Applicants Temporary Approval.  Alternatively,  Invoiced Round 1 Applicants will be left without proper remedy and will suffer irreparable harm.  We appreciate the Mayor's Office, City Council, the Commission, DCR and City Attorney's swift attention to this matter. 

Very Truly Yours,

Meital Manzuri, Esq.       

Managing Partner

Alexa Steinberg, Esq.

Partner   

Michelle Mabugat, Esq.     

Partner

About the Author

Meital Manzuri, Esq.

Managing Partner.

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