As the tug-of-war over Washington State’s six-month residency requirement for cannabis business owners continues, a lawsuit could render the whole question moot.
For years, the Washington CannaBusiness Association (WACA) has called for legislators to bring the state into line with its West Coast neighbors by lifting what the trade group calls an “unconstitutional ban on access to capital” from outside investors.
Strong pushback from small businesses and social justice advocates caused legislators to pump the brakes and shift their focus to establishing a social equity program.
Last January, legislative prospects for lifting the residency requirement looked good. But strong pushback from small businesses and social justice advocates caused legislators to pump the brakes and shift their focus to establishing a social equity program.
“I still think [allowing out-of-state investment] makes a lot of sense,” said Rep. Eric Pettigrew (D-Seattle) the sponsor of HB 2263, one of three bills that would have lifted or loosened the rule. But after a January hearing, Pettigrew says it became clear that the way Washington’s adult-use market was initially rolled out “created disproportionate access for folks who didn’t have access to all the startup money or the venture capitalists.”
“Something like this can create a lot of wealth, not just for individuals, but for entire communities,” Pettigrew continued. “And having that out-of-state investment could project the industry even further out of reach for startup possibilities for underserved communities or small investors to participate in.”
After the hearing, Pettigrew and other sponsors withdrew their legislation and focused instead on passing HB 2870, which created additional licenses and established a grant program to help minority entrepreneurs get into the industry. In September the Liquor and Cannabis Board (LCB) named a new Social Equity in Cannabis Task Force and launched a series of listening sessions to gather public input on the new program.
It’s unclear yet whether the industry will renew its push to kill the residency requirement in the 2021 legislative session. “We are in the midst of our democratic process with membership to set our 2021 Legislative Agenda and so cannot share anything official yet,” said WACA spokesman Aaron Pickus.
Opposite Positions, Same Reasoning
Interestingly, both critics and supporters of the residency requirement offer a similar argument for their respective positions–namely that their approach is better for small businesses.
“Our cannabis marketplace is artificially constrained—putting small businesses at a disadvantage when competing against better-financed businesses who already have deep-pockets in-state,” wrote Jamie Hoffman, president of Craft Elixirs, a Seattle-based maker of cannabis edibles, in a 2019 Seattle Times op-ed opposing the residency requirement. “A successful small business without a well-heeled family member or wealthy in-state investor often cannot expand to distribute statewide.”
Aaron Barfield, president of Black Excellence in Cannabis and a frequent critic of the LCB’s cannabis policies and enforcement record, counters that lifting the residency requirement would make it harder for minority entrepreneurs to gain a foothold in the cannabis industry. Allowing out-of-state investment “would drive up the value of our retail, producer and processor licenses, further pricing minorities out of the market and allow multi-state operators to come in and dominate our local producers and processors,” Barfield told MJBI.
If a lawsuit currently working its way through the state’s courts is successful, legislative action to lift the residency requirement may not be necessary.
The case, Brinkmeyer v. Washington State Liquor and Cannabis Board, was filed in June by Todd Brinkmeyer, an Idaho resident and debt financier of several cannabis dispensaries in Eastern Washington. According to Brinkmeyer’s complaint, his long-time friend and business associate Scott Atkison is in poor health and would like to sell or bequeath his ownership interest in the dispensaries to Brinkmeyer.
Brinkmeyer filed suit against the LCB after it confirmed that he could legally lend money and earn interest payments from Atkinson’s stores, but that the residency requirement would not permit him to purchase or inherit an equity stake in the business. This despite the fact that, to become a debt financier, Brinkmeyer had already gone through the same criminal and financial background checks required of residents.
Brinkmeyer’s suit seeks to invalidate the residency rule as a violation of his rights under the interstate commerce, due process, and privileges and immunities clauses of the federal and state constitutions. As precedent, it cites the US Supreme Court’s 2019 ruling in Tennessee Wine & Spirits Retailers Association v. Thomas, which struck down a two-year residency requirement for liquor store owners.
The suit also claims that the LCB illegally exceeded its authority under Initiative 502, the ballot measure that legalized cannabis in Washington in 2012. I-502 stipulated that: “No license of any kind may be issued to: …A person doing business as a sole proprietor who has not lawfully resided in the state for at least six months prior to applying to receive a license.” But it said nothing about investors, financiers, or other stakeholders in a licensed business.
The LCB expanded that residency requirement to include not just sole proprietors, but anyone considered a “True Party of Interest” (TPI) in a licensed cannabis business. A TPI is anyone “with a right to receive revenue, gross profit, or net profit, or exercising control over a licensed business.” Anyone who qualifies as a TPI must be listed on the license and meet all of the requirements, including residency.
In its response to the lawsuit, the LCB argues that Brinkmeyer’s constitutional claims are moot because, “No fundamental right exists to own a business which engages in a federally illegal activity.” It argues further that the requirement makes it easier for the agency to perform background checks and enforce the laws to keep cannabis products in-state, and that the state has a duty to respect other states’ laws.
In August, the LCB moved to have the case heard in federal court in Tacoma. On October 5, US district judge Benjamin Settle kicked it back to the Thurston County Superior Court to resolve the state law questions it raises before he considers the federal constitutional claims. As of this writing, the county judge has yet to schedule a trial date.
The WACA, which has lobbied the state legislature for years to lift the residency requirement, is following the case closely.
“WACA has consistently advocated to remove this unconstitutional ban on access to capital for regulated cannabis license-holders,” said spokesman Aaron Pickus. While the trade group is not a party to the litigation, “we are actively watching it to see how it resolves.”
If Brinkmeyer’s case succeeds in striking down the residency requirement, it would achieve through the courts what WACA has so far been unable to accomplish legislatively.
TPI Rule Change Doesn’t Affect Residency Requirement
Many industry observers were disappointed that a long-awaited revision to the LCB’s definition of a TPI released on September 2 did not substantially relax the residency requirement. According to CannaLaw Blog, the biggest change is that spouses of licensees are no longer automatically considered TPIs themselves.
The release also contained a non-exhaustive list meant to clarify who is not considered a TPI, including: financial institutions; individuals receiving a bonus or commission (within certain limits); brokers; consultants; service providers (e.g., branding or staffing companies); landlords and lessors; and option holders.