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Judge rejects medical marijuana license residency requirement

Industry officials expect Missouri to appeal the decision

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A federal judge’s ruling last month prohibits Missouri from enforcing its requirement that medical marijuana licenses are awarded to businesses primarily owned by state residents.

In the June 21 decision, U.S. District Judge Nanette K. Laughrey agreed with plaintiff Mark Toigo’s argument that the residency requirement violates the U.S. Constitution’s commerce clause. Toigo, a Pennsylvania resident who is a minority owner in marijuana dispensary Organic Remedies MO Inc., which does business in St. Louis, Cape Girardeau and Sedalia, said the requirement discriminates against out-of-state commerce.

The Missouri Department of Health and Senior Services issued regulations in 2019 concerning the medical marijuana industry authorized by the Missouri Constitution. To apply for a license, a facility must submit documents showing “the applicant is majority owned by Missouri residents” and submit proof of residency showing they have resided in Missouri for at least one year and do not claim resident privileges in another state.

Toigo argued in his lawsuit that the durational residency requirement prevents him “from directly or more fully participating in Missouri’s medical marijuana marketplace” and hinders him from investing more in Organic Remedies or from obtaining additional out-of-state investors.

Laughrey wrote in the ruling that DHSS justifies the residency requirement on the idea that it can only investigate the backgrounds of individuals who have lived in Missouri for at least a year.

However, Laughrey countered the DHSS argument in her ruling by noting an applicant “could rack up an extensive criminal history and record of financial misdeeds in Kansas, move to Missouri, and one year and one day later apply for a license to operate a medical marijuana facility. It is unexplained how the durational residency requirement would aid DHSS in uncovering this applicant’s presumed ineligibility in this circumstance.”

DHSS spokesperson Lisa Cox declined to comment on the ruling or the agency’s potential response.

The ruling comes as the state’s medical marijuana industry topped $70.3 million in cumulative sales from dispensaries. That total includes nearly $16.4 million in June – the young industry’s highest sales month to date.

Buyer base expansion
Chip Sheppard, a Springfield attorney who works with medical marijuana clients at Carnahan, Evans, Cantwell & Brown PC, said he doesn’t agree with the lawsuit.

“Generally speaking, I’m a state’s rights follower,” he said. “I don’t see a reason for the federal government to be involved as much as they are.

“This is an area where the state of Missouri knows best, especially since this is an issue that is still federally illegal,” he said, in reference to the law against traveling across state lines in possession of marijuana even with a state-issued medical card.

Sheppard said the decision shouldn’t result in a flood of out-of-state companies entering Missouri’s medical marijuana market. For dispensaries alone, 192 licenses – a total capped by the state – were awarded last year out of more than 1,200 applications.

“Any company from out of state that doesn’t have a Missouri license and wants to become a Missouri player is going to have to approach a current Missouri licensee and buy in,” he said.

Mark Hendren, president of Humansville-based grower Flora Farms LLC, agreed an out-of-state influx of companies to the local industry is unlikely due to the high demand among Missouri entrepreneurs and a likelihood of appeal by the state. Still, he said those looking to exit their companies will have a larger pool of potential buyers.

“Flora Farms gets contacted from time to time by suitors,” he said. “We’re not for sale. We’re here to grow cannabis for Missouri patients.”

Hendren is among more than 20 investors in BD Health Ventures and ERBA Holdings LLC, which does business as Flora Farms. He said over 80% of ownership comes from Missouri. Flora Farms operates dispensaries in Humansville, Neosho and Springfield as well as a cannabis cultivation facility in Humansville.

Old Route 66 Wellness also operates multiple dispensaries, and co-owner John Lopez said the ownership group has longtime ties to the southwest Missouri area. However, he said the lawsuit’s premise of out-of-state ownership wanting greater investment in Missouri’s new industry has merit.

“Still, I’d much rather see money going to Missouri residents and people who have been here their whole lives who know cannabis and want to be a part of cannabis,” he said. “I’d definitely want to see money go to our local families and local businesses.”

Missouri is one of 36 states that allows for medical use of cannabis products, according to the National Conference of State Legislatures.

According to DHSS data, 126 dispensaries are among 201 medical marijuana facilities operating throughout the state.

Patient enrollment recently surpassed 120,000, and DHSS officials said the total could surpass 180,000 in the next year, according to past Springfield Business Journal reporting.

What’s next
Despite the ruling against the state, Sheppard said he fully expects the legal case to continue.

“DHSS probably thinks that it’s obligated to appeal,” Sheppard said. “I do expect an appeal from them because they’ve got a duty to defend the constitution and the constitution is what sets out this restriction.”

Hendren said he isn’t supportive of the lawsuit, noting Oklahoma and other states have even more restrictive requirements for ownership.

Oklahoma’s medical marijuana law requires business owners to reside in the state and prohibits any out-of-state interest from having over 25% ownership in a medical marijuana company. A federal judge in May threw out a lawsuit by Washington-based Original Investments LLC, doing business as Dank’s Wonder Emporium, which challenged Oklahoma’s residency requirement, according to legal news service Law360.

Sheppard said it’s possible the Missouri case could eventually land before the U.S. Supreme Court.

“If this issue gets all the way to the U.S. Supreme Court, it may well be they’ll say all of these state residential restrictions are in fact enforceable and valid, reversing what this district court judge has said,” Sheppard said. “I don’t think that’s probably going to happen, but there’s always that chance.”

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