Legislators concerned about how to regulate out-of-state investors’ control of Arkansas Medical Marijuana businesses
A recent lawsuit alleging fraud and legal malpractice between Arkansas medical marijuana dispensary owners.
Their lawyers has renewed discussions among lawmakers on how to oversee the growing cannabis industry in Arkansas.
While lawmakers said they were worried about out-of-state investors having covert control of Arkansas medical marijuana businesses, they had few answers on how to regulate the issue when the Arkansas Legislative Council's Medical Marijuana Oversight Subcommittee met last week.
What prompted the committee's discussion were claims made in a recent lawsuit in which owners of four medical marijuana dispensaries accused a Little Rock law firm of fraud and legal malpractice, saying that despite having ownership stakes, an out-of-state company had control over the business.
"It's one of the things that I wanted the committee to look at because we have got to do a better job of monitoring a multimillion-dollar industry, and we really don't have any answers," state Sen. Linda Chesterfield, D-Little Rock, said.
In their amended complaint filed in September, Marshall Wright and Josh Landers, two of the co-owners of Big Fish of North Central Arkansas, accused the Little Rock law firm Steel, Wright, Gray PLLC of fraud and legal malpractice.
According to the lawsuit, in 2016 Wright "was a very small percentage owner" in Steel, Wright, Gray, although the firm still lists Wright as a team member, with a photo and bio of Wright on the law firm's website.
The complaint states that the Little Rock law firm used Wright's and Landers' status as Arkansas residents to gain medical marijuana dispensary licenses, while the company was controlled by an out-of-state firm. The lawsuit also states that Wright and Landers are on the hook for the business' tax liabilities without receiving revenue.
An attorney representing Steel, Wright, Gray asked the court to dismiss the lawsuit, denying the allegations. Steel, Wright, Gray also filed a defamation lawsuit against Marshall Wright and lobbyist Richard Pace earlier this month.
Under Amendment 98, which voters passed in 2016 to legalize medical marijuana, 60% of the owners of a medical marijuana dispensary or cultivation facility need to have lived in Arkansas for at least seven consecutive years. However, dispensary owners are allowed to enter into a management agreement to allow others to run the business on their behalf.
"It is very concerning when I hear that you can own 60% of a company, somebody else can have 66% of the voting rights of the company and therefore control that company," Chesterfield said. "And we have no control whatsoever over any of it."
Trent Minner, the regulatory administrator who oversees medical marijuana at the Department of Finance and Administration, said the Alcoholic Beverage Control Division, Medical Marijuana Commission and the Attorney General's Office review management contracts to confirm that dispensaries follow the state's constitutional requirement that 60% of the business is owned by Arkansas residents. However, state regulators don't oversee who has voting rights of any particular medical marijuana business, Minner said.
Doralee Chandler, an assistant attorney general and former director of the Alcoholic Beverage Control Division, told lawmakers last week that regulating the management agreements is "not within Amendment 98's control."
What authority the Legislature has to regulate the medical marijuana industry is unclear. Since medical marijuana was legalized through a constitutional amendment, it is difficult for lawmakers to tweak it.
State Sen. Mark Johnson, R-Little Rock, said if medical marijuana had been legalized through an initiated act, which would be easier for the General Assembly to amend, lawmakers could act on regulating the industry.
"This is an example of what happens ... when you put something in the constitution, you get a law of unintended consequences," Johnson said.
Complicating matters more, whether the Legislature can pass laws regulating medical marijuana is an open question after Pulaski County Circuit Judge Morgan "Chip" Welch ruled that the General Assembly overstepped its authority when it passed laws regulating the industry.
Welch wrote that since medical marijuana was legalized through a constitutional amendment by the voters, laws that effectively changed the amendment needed to be referred to the voters for approval. Through his ruling, Welch declared that 27 laws regulating medical marijuana are "void" and "unconstitutional," but since his ruling wasn't a final order, the case is still in limbo, Chandler said.
"So Amendment 98 obviously did not envision the ability of individuals to get around the purview of [Amendment] 98, it seems to me," Chesterfield said.