Why DHS’ Lottery to Pick 125 Dispensary Winners is a Mistake

I believe that the proposed AZDHS rule whereby the Department will allocate Medical Marijuana Dispensaries to applicants by lottery is a big mistake, for the following reasons:

  • The rules require an applicant to submit a number of items with their application. Included are a business plan, an inventory plan, a security plan and other items. The Department might receive an application from one applicant including a business plan that is thorough and persuasive concerning the likely success of the applicant’s proposed operation of a dispensary. Another applicant might submit a sheet that says “Business Plan” at the top, but which contains little that is helpful or persuasive concerning the applicant’s likelihood of success. Since the Department’s rules contain nothing to help evaluate or rate or differentiate between the 2 submissions, each will be entitled to be submitted with an equal chance to be chosen from the lottery. (assuming some form of the other required items have been included with each application.)
  • The fact that, per the proposed rule, the business plan and other required submissions will not be read, evaluated or scored renders the required submission of those documents meaningless.
  • The Department is charging a fee of $5,000 to file an application. Only $1,000 would be refunded to an applicant who submitted a complete application and whose application was therefore submitted to the lottery. People have speculated that 2,000 or more applications could be filed. If 2,000 applications were submitted at $5,000 each, the gross would be $10,000,000. If every one of the applications were complete (unlikely), 1,875 refunds of $1,000 each ($1,875,000) would need to be made. The net would be a minimum of $8,125,000. Since some of the applications would likely be incomplete and the applicant would not receive a refund, the net would probably be even more. With this large amount of funds, certainly the Department should have the resources to read, evaluate and score the applications received.
  • If AZDHS awards the right to obtain a license to an obviously unqualified applicant because AZDHS has been unwilling to read, evaluate and score the applications received, even though it has received millions of dollars in application fees from applicants, it will subject itself to legal action by qualified applicants who were denied the right to obtain a license or even the opportunity to have their applications and evidence of qualifications evaluated.
  • The lottery proposal encourages gaming of the system or even fraud. I have heard of groups who intend to submit 20 or more applications. A group of investors could file applications by each of the individuals in the group with an agreement that if any of them were successful, the unsuccessful individuals would be brought into partnership with the successful applicant. There could even be straw applicants submitting applications on behalf of undisclosed principals. All of this would be incentivized by the unwillingness of the Department to read, evaluate and score the applications received.
  • The people who drafted the ballot measure made a great effort to make the Arizona Medical Marijuana system subject to comprehensive and sensible regulations in order to avoid some of the “free for all” problems occurring in some of the other States that have previously allowed Medical Marijuana. Providing a system where applications and the attached submissions are read, evaluated and scored will result in the most qualified applicants being chosen for the limited number of licenses. Refusing to evaluate the applications will promote the opposite, leading to instability in the industry and problems for law enforcement the public and the Agency.
  • If unqualified applicants are chosen by lottery for the right to submit the additional items necessary to receive permission to operate, and are unable to perform because they lack the resources or are incompetent, the dispensary permit could sit idle for a year until the next opportunity for the Department to receive applications. This would deny the public access to a dispensary in that area and would allow patients with cards to grow their own medical marijuana if they were more than 25 miles from the closest other dispensary.
  • Awarding licenses to unqualified applicants will likely cause problems with patient services as well as unpaid bills and other problems related to failure of dispensary businesses due to lack of qualifications of the applicants.
  • If the Department is unwilling to evaluate the suitability and qualifications of the applicants, it should at least require a bond or a posting of a cash deposit, to guarantee performance by a successful applicant. This should be required as a condition of submitting the initial application.
  • The nature of the business as well as the regulations imposed by the Statute and the Agency rules guarantee that it will be expensive to open and operate a dispensary. If a prospective applicant does not have the financial resources to be able to successfully open and operate a dispensary, he or she should get the backing of someone who does. This is no different from any other business opportunity. While those without resources might complain that it is unfair to deny them the chance to receive a license, it is just as unfair to choose someone without the qualifications, competence and resources necessary to be successful, on the basis of a “game of chance” over someone who has the qualifications, competence and resources required to be successful. It is also unfair to the public who will be using the services of dispensaries to impose upon them, based on a “game of chance”, prospective dispensary operators who are not likely to be competent and/or successful in providing good service to the patients.
  • If the State of Arizona wanted to have a low regulation industry and let the market choose the winners and losers, it could do that. Arizona has not made that choice, though. Arizona has chosen a highly regulated system involving very limited access to licenses. The regulations imposed by the State increase the resources and competence required to operate successfully. With this type of system, the State Agency has the responsibility to do what is necessary to increase the odds that the very limited number of business opportunities will be given to those who are likely to be able to perform.
By |2011-02-04T16:15:32-07:00February 4th, 2011|DHS Rules|Comments Off on Why DHS’ Lottery to Pick 125 Dispensary Winners is a Mistake

Is DHS’ Lottery for a Medical Marijuana Dispensary License Gambling in Violation of Arizona Law?

Under the second draft of Arizona’s medical marijuana rules issued by Arizona Department of Health Services on January 31, 2011, DHS proposes to select dispensary registration certificates (aka dispensary licenses) by a lottery.  The rules divides Arizona into 126 zones called Community Health Analysis Areas (CHAAs).  DHS will allow one dispensary in each CHAA.  Currently there will be 125 possible dispensaries so one CHAA may not have a dispensary.

DHS will begin accepting applications for dispensary registration certificates for thirty days on May 1, 2011.  On June 30, 2011, DHS will award dispensary registration certificates as follows:

  • If a CHAA has only one qualified application for a dispensary registration certificate, that applicant will be awarded the certificate.
  • If a CHAA has more than one qualified application for a dispensary registration certificate, DHS will conduct a lottery and the winner will be awarded the certificate.

DHS has created a new Arizona lottery.  Here is how the new lottery works.  Pay $5,000 and take a chance your chit will be pulled out of a hat.  If your number is picked, you will win a really big valuable prize, i.e., a state authorized monopoly to make money.

How can DHS unilaterally create a new Arizona lottery.  I thought legalized gambling in Arizona had to be authorized by a law passed by the legislature and signed by the governor.  Apparently I am wrong.

Arizona Revised Statutes Section 13-3301.1 states:

“Gambling” or “gamble” means one act of risking or giving something of value [$5,000] for the opportunity to obtain a benefit [a dispensary registration certificate] from a game or contest of chance [the lottery conducted by DHS for a dispensary registration certificate] or skill or a future contingent event but does not include bona fide business transactions which are valid under the law of contracts including contracts for the purchase or sale at a future date of securities or commodities, contracts of indemnity or guarantee and life, health or accident insurance.”

I submit that DHS process does not involve a contract.  There will not be any contract between the applicants and DHS so the contract exception will not apply.

Arizona Revised Statutes Section 13-3303 states:

A. Except for amusement, regulated or social gambling, a person commits promotion of gambling if he knowingly does either of the following for a benefit [a dispensary registration certificate] . . . Conducts, organizes, manages, directs, supervises or finances gambling.

B. Promotion of gambling is a class 5 felony.

Is the DHS lottery exempt from Section 13-3303 and therefore not illegal under Arizona law because it is amusement, regulated or social gambling as defined in Section 13-3301?  It is clear to me that the DHS lottery is not amusement or social gambling.  DHS would probably claim its lottery is regulated gambling, which is defined in Section 13-3301 as:

Regulated gambling” means either:(a) Gambling conducted in accordance with a tribal-state gaming compact or otherwise in accordance with the requirements of the Indian gaming regulatory act of 1988 (P.L. 100-497; 102 Stat. 2467; 25 United States Code sections 2701 through 2721 and 18 United States Code sections 1166 through 1168); or

(b) Gambling to which all of the following apply:

(i) It is operated and controlled in accordance with a statute, rule or order of this state or of the United States.

(ii) All federal, state or local taxes, fees and charges in lieu of taxes have been paid by the authorized person or entity on any activity arising out of or in connection with the gambling.

(iii) If conducted by an organization which is exempt from taxation of income under section 43-1201, the organization’s records are open to public inspection.

(iv) Beginning on June 1, 2003, none of the players is under twenty-one years of age.

Conclusion:  The DHS rules that create a lottery to select dispensary registration certificates is legalized gambling because it appears to be regulated gambling, which is exempt from the criminal prohibition on gambling set forth in Section 13-3303.  Given the public interest in the lottery and the high value of the prizes to be awarded to the sweepstakes winners, DHS should make public the lottery procedures and televise every drawing to avoid the appearance of impropriety and actual impropriety.

By |2017-02-11T20:34:34-07:00February 3rd, 2011|DHS Rules, Legal Issues|Comments Off on Is DHS’ Lottery for a Medical Marijuana Dispensary License Gambling in Violation of Arizona Law?
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