Licensing Scheme for Medical Marijuana Market May Be a Boon for the Black Market in Washington State
Critics contend current cap on new cannabis stores is too low and could force many patients to turn to back-alley providers
The state of Washington’s medical-marijuana industry has been in disarray since the passage of legislation last spring that calls for pushing businesses in that now-unregulated “grey market” into the state’s regulated recreational-cannabis market.
The turmoil has been exacerbated by a new licensing cap established for cannabis outlets, which critics contend is based on a dramatic underestimation of the demand for medical marijuana (MMJ) in the state. Those critics argue further that the “under-licensing” will only lead to an expansion of the black market — and associated social woes — that the cannabis-legalization movement is designed to negate.
A recent public-records request by Narco News has produced a series of emails and documents that tend to support the MMJ community’s concern that state regulators may have low-balled the number of new retail-store licenses being issued to address the state’s medical-cannabis demand.
Washington’s MMJ grey market has operated for years in the open, under a thin veneer of legal protections and absent formal regulation. That all comes to an end as of July 1 of this year, when a select number of MMJ dispensaries, or storefronts, will be issued recreational licenses based on an elaborate rank-ordering review system, and the balance of the dispensaries will be forced out of business by the state.
The assumption by some cannabis experts is that many of the grey-market MMJ entities that do not make the licensing cut, along with the patients they serve, will essentially slip into the black market — opening them up to potential criminal prosecution. Many MMJ advocates see the new recreational licensing scheme for the MMJ market as a slap in the face to long-suffering patients who will lose access to the specialized services and products they need if forced into the commercialized recreational market. They would have much preferred a dual-track licensing system that set up a specialized regulatory scheme for medical marijuana designed with patients in mind.
Regardless, that is not what is playing out in Washington at this time. The state’s MMJ dispensaries, or at least some fraction of them, are being rolled into the recreational market, so getting the licensing count right for this newly regulated MMJ market is critical, or patients will suffer because their needs won’t be served — as will the entire legalization movement if large numbers of MMJ operators slide from the grey market into the illicit market.
Before a regulated market serving MMJ patients can be established, however, the Washington State Liquor and Cannabis Board (WLCB), which is charged with overseeing the state’s cannabis-legalization experiment, first has to determine how many grey-market storefronts exist, as well as assess how many patients those outlets serve. The fact that this grey market, to date, has not been regulated makes that job quite difficult.
To address this dilemma, the WLCB last fall contracted with a California-based company, BOTEC Analysis Corp., to conduct a survey of the Washington MMJ market to estimate its size in terms of revenue, down to the county level. That report was to be used by the WLCB as a basis for estimating the number of new recreational licenses that should be issued to serve the needs of the MMJ market.
Along with the new licenses, the WLCB also is issuing “medical endorsements” to existing retail licensees that will allow those establishments to sell cannabis to authorized medical patients. To date, according to the LCB, about 80 percent of the existing licensees have sought those endorsements.
Prior to mid-December of last year, the license cap for recreational cannabis stores statewide was set at 334. The LCB expanded that cap by 222 licenses (for a total of 556 retail licenses) in the wake of the release of the BOTEC report on Dec. 15, 2015.
“Based on the BOTEC report and our ability to monitor new stores for compliance with state law, the [federal] Cole Memo, and the number of existing retail stores that had expressed interest in medical endorsements, we estimated the need for approximately 220 additional stores,” said Brian E. Smith, WLCB’s director of communications, in an email to Narco News.
The formula developed by the WLCB for issuing the new license was pegged to the size of each county’s estimated MMJ sales, as projected by the BOTEC report. The 10 counties with the highest cannabis sales received a 100 percent boost in retail cannabis licenses over their existing allotment, while all other counties were granted a 75 percent boost, resulting in the WLCB’s magic number of 222 new licenses to accommodate the MMJ market. The handful of counties that have enacted local bans on cannabis sales were excluded from the license bump.
The problem with this approach is that the BOTEC report’s revenue estimates are themselves based on an estimate of existing MMJ dispensaries, a number that is far from firm and also is in flux. A recent report issued by the University of Washington’s Cannabis Law and Policy Project, which also was commissioned by the LCB, had this to say about the dispensary-estimation process:
BOTEC believed (and we agree) that many dispensaries have likely closed in the months following the HB 2136 and SB 5052 [cannabis-market] reforms, thus estimating the medical-marijuana market in its current state might be underestimating what true medical-marijuana demand is.
Jedidiah Haney, interim board secretary of The Cannabis Alliance, a Washington State cannabis trade group, contends the actual number of MMJ entities in operation prior to the passage last year of the state’s MMJ-reform legislation (HB 2136 and SB 5052) was at least 1,500 statewide. BOTEC put the number at 331, but also concedes that in assembling an MMJ dispensary list for its report, it surveyed only 100 of the more than 1,900 recreational-license applicants who had been rejected by WLCB as of this past fall. That disclosure is referenced in a small-type footnote at the bottom of page 10 of the report.
It is not unreasonable to conclude, MMJ advocates contend, that a fair share of those rejected applicants either operate MMJ entities or were previously involved in the medical-cannabis market and decided to shut down their grey-market shops in order to pursue a legal license. Many also might not be responsive to state-sponsored surveys seeking information about their former grey-market operations.
“The [license] cap needs to be raised,” Haney said. “It underserves the market, and will likely lead to patients being forced back into the black market, which is counterproductive.”
Reasonable people can agree to disagree on the size of Washington’s grey market prior to the passage this past spring of legislation mandating that it be consolidated into the recreational-cannabis market. But it does appear that BOTEC’s report comes down on the low end of the estimates, and that report is what the WLCB used, in large measure, to set its current licensing cap.
A media talking-point summary on the subject prepared by the WLCB and obtained by Narco News, via its public-records request, puts it this way:
This [the cap of 222 new licenses] is an issue that will likely have more detractors than supporters. The reason is that licensed recreational-retail stores want less stores integrated into the market. Dispensaries want the maximum number of stores so they can be integrated into the system prior to the [July 1, 2016] deadline.
No one knows exactly how many dispensaries exist in Washington because many aren’t registered or pay taxes. By its admission, BOTEC’s numbers are not exact.…
… The WLCB has used the [BOTEC] report as a basis to determine the number of additional retail stores necessary to meet the additional demand brought on by the integration of the markets. … The number of retail stores the board is issuing is reasonable and makes sense given the lack of factual data that exists today within the medical-marijuana community.
One cannabis-market expert, who asked not to be named, with tongue in cheek said that it seems the WLCB is saying that their actual reasoning for setting the 222-license cap is “based on a lack of information.”
That lack of information also is apparent in another key part of the MMJ equation. A contract amendment between the WLCB and BOTEC — obtained via an open-records request — makes it clear that BOTEC, as part of its report, also was supposed to provide a reasonable estimate of the number of MMJ patients statewide.
From the Nov. 30, 2015, contract amendment:
The WLCB is concerned that without seeing estimates of the number of patients or the amount of cannabis that went “out the door” for dispensaries, we cannot use this report to estimate the need for additional stores. …The WLCB needs to know both a supportable estimate of the number of patients served and how much cannabis was provided. [Emphasis added.]
Unfortunately, that “supportable estimate of the number of patients” never materialized.
“BOTEC did attempt to estimate the number of patients,” WLCB’s Smith said in an email to Narco News. “A specific number is just not available. [The] subsequent report by the University of Washington reached the same conclusion.
“The bottom line for the Liquor and Cannabis Board is that we’re satisfied with the methodology in the report and that BOTEC met its contracted obligations.”
BOTEC may well have met its contract obligations in the eyes of the WLCB, but the consulting firm's report, as well as the University of Washington report released earlier this week (commissioned by LCB to help determine the adequacy of existing plant-canopy limits for cannabis growers) both fail to offer an estimate of the number of MMJ patients statewide. That appears to be a fatal flaw in the BOTEC report, which makes it of little use in setting a store-licensing cap to accommodate MMJ demand — if the WLCB’s contract amendment with the company is to be believed.
If that’s the case, then what is guiding WLCB’s licensing philosophy? That is a crucial question, because the WLCB, through its licensing authority, is determining the economics of the legal-cannabis market. If the agency sets the retail cap too low, it reduces access and risks forcing more players into the black market, which undermines the cannabis-legalization movement — a bold and important experiment underway in Washington that can help set the tone for the nation.
Unfortunately, under-licensing the market also opens the door to the capture of the state’s cannabis market by big-money interests more focused on profits than serving MMJ patients — signs of which are already in motion.
On the other hand, if the regulators set that retail license cap too high, the market becomes far more dynamic and difficult to regulate — which, in a worst-case scenario of a breakdown in regulation, could lead to federal intervention, given marijuana's still-illegal status under federal law.
As mentioned, WLCB’s Smith pointed out that along with the BOTEC report, another major factor in determining the licensing cap was “our [WLCB’s} ability to monitor new stores for compliance with state law [and] the Cole Memo” — a federal proclamation issued in 2013 that, as a condition of allowing the Washington’s cannabis experiment to proceed, mandates that the state maintain a “tightly regulated market.”
So it would seem independent of the BOTEC or University of Washington reports, the LCB has a big incentive to err on the side of issuing fewer rather than more retail cannabis licenses to reduce the risk of running afoul of the feds.
The validity of that proposition is actually evidenced in an email written last year by former U.S. Justice Department official and current BOTEC Chairman Mark A.R Kleiman. Kleiman sent the email to Bob Schroeter, WLCB’s director of public records and support services, who helped to coordinate BOTEC’s contract work for the agency.
From Kleiman’s Nov. 19, 2015, email to the WLCB, obtained via a public-records request:
… From the beginning, many of us in the drug-policy community have worried that legalization would result in large price decreases, risking large increases in heavy, problem use and in use by adolescents. Nothing that has happened since 2012 has done anything to assuage those fears.
So — again, my private view — the incorporation of the medical system may provide the Board [WLCB] with an unexpected chance to protect the public health merely by inaction.
Since it's easier to issue new licenses than to take back licenses already granted, if I were making the decisions I would err on the side of under-licensing…. [Emphasis added.]
The WLCB’s Schroeter, the day after receiving Kleiman's email, forwarded the missive to the director and deputy director of the state agency, with the following note:
“I will be following up with Mark [Kleiman] … on this concept in a 2:30 call today.”
When asked whether the leadership of the WLCB decided to apply the BOTEC chairman’s reasoning in arriving at the agency’s current 222-license cap for accommodating a regulated MMJ market, the WLCB’s Smith did not reply, other than to say:
“As the contracted consultant, BOTEC is entitled to float concepts and opinions. The LCB is the final decision-maker based on the information before it” — or the lack of information, as the WLCB’s media talking-points document notes.
Jeremy Ziskind, director of projects and marketing for BOTEC, declined to answer questions about the company’s reports, or the emails and documents surfaced in Narco News’ open-records request.
“We will be directing all of your questions to the WLCB,” Ziskind said.