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This guest column is from Hal McCabe and Andrew Rosner of CANY. The views and opinions expressed in this article are those of the authors, and do not necessarily reflect the views or positions of NY Cannabis Insider.
The energy and hope that the cannabis industry held with the passage of the Marijuana Regulation and Taxation Act (MRTA) in March of 2021 has turned to fear and despair after a much longer than anticipated regulatory rollout.
It has been roughly two and a half years since enactment of the statute – including a later than expected regulatory package and the agency’s revisions, and the subsequent lawsuits challenging the regulatory authority of the OCM’s implementation of its Conditional Adult-Use Recreational Dispensary (CAURD) program.
On the supply side, the delays have left licensed growers and processors with a huge supply of cannabis and cannabis products that they cannot sell, crippling the value of the significant investments that these businesses made.
On the retail side, legal challenges have led the courts to render all but about 20 of well over 400 CAURD licensees with the ability to sell legal cannabis, leaving many of those applicants issued conditional licenses with no immediate path forward, and driving a substantial portion of cannabis consumers to a robust and potentially dangerous illicit cannabis market.
These concerns have been further enhanced by regulators’ recent promise to Registered Organizations (ROs), accompanied with its amended regulatory package, to accelerate and enhance their ability to vertically integrate in the market – severely limiting the ability of small businesses and those most impacted by prior cannabis laws (those who the MRTA were intended to protect) to compete in the market.
In the latest lawsuit, a group of disabled veterans have argued that the OCM and CCB have acted outside of the scope of their regulatory authority by creating the CAURD program, which provides retail dispensary licenses to qualified justice-involved businesses. The MRTA requires all license applications to open at the same time, with half of the eligible licenses going to social equity applicants (which would include disabled veterans and justice-involved individuals alike, among other groups).
In a decision regarding the plaintiff’s request for a preliminary injunction, the judge in Ulster County has essentially ruled in favor of the plaintiffs, leaving New York with roughly 20 cannabis retailers, and ordering the CCB to call a meeting as quickly as practicable to approve its regulatory package and roll out applications for all licensees.
In its papers, the OCM has argued that under the State Administrative Procedure Act (SAPA), its proposed adult regulations published in the Dec. 14, 2022, issue of the NYS Register, expire on Dec. 14, 2023 (one-year after publication). The regulator further argues that this trigger date leaves them with only two choices: (1) to adopt the regulations as-is; or (2) to allow the regulations to lapse and propose a new regulatory scheme that corrects all potential ills, which would delay market implementation for likely another year. Clearly, for concerned market participants, neither is an ideal choice. But maybe there are other options.
Option 1: Non-substantial revision
We agree that generally, if an agency does not adopt a proposed regulation within one year of it being published in the register, the regulation would expire, and the agency would need to start from scratch with a new regulatory proposal.
If the CCB and OCM were to release amended regulations at its planned Sept. 12 meeting, it would require a 45-day comment period on amended regulations, and the regulator likely would not have time to adopt those regulations ahead of their Dec. 14 deadline. However, under Section 203(2)(b) of SAPA, an agency can adopt regulations with revisions, without the need for an additional comment period, provided those revisions are not substantial. Taken from a seminal case on the issue of substantial revisions:
Subdivision 9 of section 102 of the State Administrative Procedure Act defines a substantial revision as any addition, deletion or other change in the text which materially alters its purpose, meaning or effect. The purpose of the requirement for notice of revised rule-making is obviously to provide the public with notice so that they may comment upon proposed changes. It is not to increase administrative expense or delay administrative action by requiring administrative agencies to start anew each time minor changes in regulations are made as a result of the outcome of public hearings and comments. The federal courts have phrased the test as whether the final rule is a “logical outgrowth” of the proposed rule, or if the notice provided would “fairly apprise interested persons of the ‘subjects and issues’ ” (Small Refiner Lead Phase–Down Task Force v. U.S.E.P.A., D.C.Cir., 705 F.2d 506, 547). Thus, in determining whether a revision is substantial or not, the Court must look at the revision within the context of the entire proposed regulation. Revisions to extensive technical regulations which might be deemed substantial within the context of a short regulation of limited scope may be found to have no significant impact on the purpose, meaning or effect of such larger regulation. Moreover, the Court should consider whether the notice of proposed rulemaking already published for the initial proposed regulations would require any changes to cover the revisions.[1]
For the context of this option, let’s consider an argument made by the Cannabis Association of New York (CANY), that the OCM’s proposed regulations allowing ROs to cultivate cannabis with 100,000 sq. ft. of canopy (in a controlled indoor environment) will cripple those small growers and processors with a year’s worth of product rotting on shelves – and they were only allowed to grow on an acre of property (primarily outdoor, which severely limited their ability to control pests and grow environments).
How can these small cultivators and processors compete with vertically integrated producers (meaning the ROs can sell at their own retail locations), when those vertically integrated companies have such a massive advantage on growing space and conditions? CANY has suggested that the ROs should be allowed to compete with everyone else, with up to 20,000 sq. ft. of indoor canopy space provided to ROs – a compromise that fosters parity between all parties.
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Under the OCM’s interpretation of SAPA, they could not make such a change without a second comment period, and therefore must adopt the regulations as currently proposed – giving significant advantage to potential RO licensees.
CANY believes that in the context of over 300 pages of adult-use regulations, governing all of the various types of licensees, modifying the square footage of cultivation canopy for RO licenses would not qualify as a substantive revision. The OCM may consider using the few days left before their Sept. 12 meeting to consider making potential non-substantive revisions to their adult-use package cannabis regulations that would benefit the entire market.
Option 2: Make substantive revisions
Another possibility to consider is whether the OCM and CCB can make substantive revisions and still adopt the regulations prior to expiration.
Under Section 202(3) of the SAPA, if “within ninety days of the date on which a rule will expire, an agency submits a notice of revised rule making for the rule, the rulemaking will be continued for an additional ninety days beyond the date on which it would have expired.”
If applied here, the OCM and CCB could theoretically make substantial revisions to the regulations, addressing not only critical market concern – but also those provisions likely to lead to constitutional or other legal challenges – and submit amended regulations to the Department of State on any date between Sept. 14 and Dec. 14, extending their drop-dead date of submission of final regulations to the Department of State to March of 2024.
While no one involved in the industry wants any additional delays in market rollout, this option could give the OCM and CCB an opportunity to correct any potential ills in the proposed regulations that are likely to lead to further legal actions – and potentially further injunctions.
It would also provide the regulator an opportunity to address market-related concerns that will help to advance regulated cannabis – without having to let the regulations expire and starting over.
Option 3: Withdraw the proposed regulatory package and release an emergency and proposed regulatory package
One additional option that the regulators could potentially employ is to withdraw their current adult-use regulations, and simultaneously release a new proposed regulatory package and adopt their regulations on an emergency basis.
This power was specifically granted to the CCB under Section 13(5) of the Cannabis Law.
If this option were implemented, the market could begin to operate more fully under the emergency regulations, while the proposed regulations go through their regulatory process (final adoption within the period allowed for the emergency regulations).
This begs the question, how does an emergency regulation work?
Under Section 202(6)(a) of SAPA:
Notice of emergency adoption. (a) Notwithstanding any other provision of law, if an agency finds that the immediate adoption of a rule is necessary for the preservation of the public health, safety or general welfare and that compliance with the requirements of subdivision one of this section would be contrary to the public interest, the agency may dispense with all or part of such requirements and adopt the rule on an emergency basis.
Here, the OCM and CCB could decide that it is in their best interest to start the regulatory process anew, modifying their regulations to address a myriad of concerns. They could declare that the proliferation of New York’s illicit cannabis market, which provides unregulated and untested cannabis and cannabis products to consumers, some of which may contain dangerous substances,² constitutes a public emergency, and waiting an additional year to roll out the cannabis regulations will be against the interest of the public – and therefore, these regulations are adopted (effective immediately) to help address that emergency.
The emergency regulations would be effective for 120 days, but could not be re-adopted, giving the OCM four months to complete the final regulatory package.³ Using this option would allow the regulators to roll out the program while perfecting the final regulatory package – protecting the public, addressing industry concerns, and buttoning up their positions to beat back any potential future legal challenges.
Conclusion
While New York’s cannabis regulators are facing an undoubtedly challenging task, there may be other options to help effectively adopt their regulatory scheme than are currently being considered.
An argument could be made that considering any of the options above will help the regulators roll out a cannabis program that is good for consumers, industry participants, and also protect the state and industry from significant future legal challenges. These options provide a pathway for the OCM and CCB to launch retail licensing and include the CAURD licensees while opening the door for the legislature to take action.
Footnotes:
1. See Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. Jorling, 152 Misc.2d 405 (1991).
3. See Section 13(5) of the Cannabis Law.