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Medical marijuana residency rules: Jessica Corry threatens litigation if they're not changed

At this writing, an emergency hearing of the new Department of Revenue Medical Marijuana Licensing Authority is underway. And like MMJ activist Laura Kriho, attorney Jessica Corry feels the residency rules that will be up for discussion are extremely problematic -- a position spelled out in a document on view below that Corry calls "groundwork" for potential litigation.

Corry understands that the Department of Revenue can't simply rewrite HB 1284, the measure passed to regulate the medical marijuana industry in the state.

"Under Colorado administrative law, the Department of Revenue is limited in its ability to strike down the discriminatory residency provision," she concedes. "But we see today as an opportunity to fully communicate our concerns about the unconstitutional reality of any attempt to ban participation by new residents or out-of-staters."

While Kriho was unclear about whether citizen comment will be allowed at this morning's meeting, Corry says she's been assured that the public can attend, and she's hopeful individuals will be able to share their concerns. She synopsizes those identified by her and law partner Bob Hoban like so:

"The state is allowed to discriminate against out-of-state residents in very limited cases -- and if somehow the state was able to demonstrate that out-of-state investors in the medical marijuana industry were creating problems sufficient to justify discrimination, they could possibly be able to do so legally. But thus far, the state has put forth no evidence whatsoever that out-of-staters have caused any problems, and we don't believe they'll be able to provide that evidence if we move forward in litigation.

"Out-of-state investors have provided thousands of jobs, as well as lines of credit at a time when it's extremely difficult if not impossible for medical marijuana businesses to obtain conventional lending. So this provision fails not only on legal grounds, but also on public policy grounds. How can the state even begin to justify excluding market participants who have together provided one of the only bright spots for Colorado's economy in recent years."

Corry adds that "the state now estimates that there will be 150,000 applications every year for medical marijuana patients. That's a tremendous number, and if indeed the state is committed to having an open, transparent marketplace that best protects the rights of patients, the discriminatory residency requirement can only be seen as hurting patients. It limits competition and has already forced many patients to see out new caregivers."

Not that Corry is entirely down on the Department of Revenue. "They've taken what we consider to be good-faith efforts to interpret the rules ina way that's as accommodating to the constitution as possible," she allows. For example, "we see the Department of Revenue is allowing promissory notes from out-of-state investors, which is a step in the right direction. But it's certainly not enough."

She adds that "today is about laying the groundwork for litigation -- litigation we hope we don't have to pursue. But we will should the state not act in a constitutional way."

Page down to read Corry and Hoban's argument against the current residency rule:

Matt Cook Director Colorado Department of Revenue 1881 Pierce St., Ste 112 Lakewood, CO 80214-1496

August 2, 2010

Re: Draft Emergency Rule Defining "Residency" For Medical Marijuana Center Owners, Operators, Investors, and Employees

Dear Mr. Cook,

Thank you for welcoming our firm to submit comments in advance of today's emergency public hearing. We have done so below, specifically in response to your agency's draft emergency rule interpreting House Bill 1284's residency provision.

This discriminatory provision, which restricts, and in some cases, altogether bans business participation by non-Colorado residents and new residents is clearly unconstitutional. While we acknowledge that your agency has limited power in its ability to alter or overturn the legislature's mandates here, we request that you please preserve this correspondence, including our comments, as part of the official administrative record.

As our firm has previously communicated on behalf of our clients, as well as patients and caregivers across Colorado, we have very serious concerns about any attempt by the State to restrict ownership, investment, or employment opportunities based on residency status. As you will see below, we have framed our analysis in three distinct areas.

First, we articulate our opposition to such discrimination as a violation of all guidance and standards provided by the U.S. Supreme Court, other courts, as well as Colorado's own state statutes.

Second, we express concerns with the aforementioned attempt at discrimination under a 5th Amendment due process/takings analysis, and would caution the state against any attempt to retroactively apply any residency mandate to any medical marijuana owner, investor, or employee who was not a Colorado resident before Dec. 15, 2010. Under a property rights provision included in Amendment 20, as well as governing state and federal law governing retroactive regulatory takings, such action by the State could ultimately require that dislocated individuals be compensated for their related business and/or personal economic losses.

Third, we discuss the draft residency rule, also including possible suggestions for remedying unconstitutional or otherwise improper language.

I. RESIDENCY-BASED DISCRIMINATION HERE VIOLATES STANDARDS SET FORTH BY U.S. SUPREME COURT, THE U.S. CONSTITUTION, AND THE COLORADO CONSTITUTION

a. U.S. SUPREME COURT ANALYSIS

In its 1972 decision in Hicklin v. Orbeck, 437 U.S. 518 (1978), the U.S. Supreme Court struck down an Alaska statute requiring hiring preferences for Alaska residents over non-residents, with residents required to present state-issued residency cards to potential employers when applying for any job in the state's oil and gas industry.

While Alaska's statute primarily targeted jobs resulting from state contracts or state involvement, the Court's ruling did not end there and should not be construed as applying only to state contracts and employment. Indeed, the Court rejected Alaska's argument that its ownership of oil and gas interests across the state justified its discrimination against non-residents, ruling that Alaska's statue also applied to employees and employers who had little or no connection to State interests, including those who had no contract with State, received no compensation from State, and who performed no work on public lands.

Applying this standard to Colorado, House Bill 1284's discriminatory residency requirement also fails. As a state-regulated industry, Colorado's medical marijuana businesses, through their owners, investors, and employees, are afforded the same protection against arbitrary residency-based discrimination.

Next, in ruling that Alaska had violated the U.S. Constitution's Privileges and Immunities Clause of Article IV and the Equal Protection Clause of the Fourteenth Amendment, the Court held that discrimination against out-of-state residents is permitted only where non-citizens "constitute a peculiar source of evil at which the statute is aimed." Alaska had presented no evidence that out-of-staters were a major cause of unemployment, or any other evil for that matter.

Here, Colorado finds itself in a similar position, if not an even weaker one. At a time when unemployment across Colorado edges up toward nine percent, medical marijuana-related businesses, including those operated by non-residents, have provided thousands of jobs and backfilled state and local tax coffers to the tune of millions of dollars.

One small example: The Denver Post reported in June, the City of Denver collected $1,023,308 between December and April in medical marijuana sales tax receipts. By March, the City was collecting over $200,000 a month. While determining the exact number of jobs the industry has created this early into its existence remains an inexact science, national media reports (CNN, CNBC, Today Show, USA Today, Wall Street Journal, Atlantic) together with our own analysis, give solid indications that the number of jobs created could be over 10,000.

While the Court stopped short of disallowing residency-based discrimination by the states in all cases, it relied on Toomer v. Witsell, 334 U.S. 385 in ruling that the Privileges & Immunities Clause did bar "discrimination against citizens of other States where there is no reason for the discrimination beyond the mere fact that they are citizens of other States." See also Mullaney v. Anderson, 342 U.S. 415. Pp. 524-526.

Ultimately, as Colorado begins its administrative rule making process for medical marijuana-related businesses, it should do so knowing that the State cannot survive the standards set forth above by the nation's highest court.

b. COLORADO LEGAL ANALYSIS

Any residency-based discrimination as applied to Colorado medical marijuana-related businesses also fails at least twice under a state constitutional analysis.

First, under Article II, Section 27 of the Colorado Constitution, "Aliens, who are or may hereafter become bona fide residents of this state, may acquire, inherit, possess, enjoy and dispose of property, real and personal, as native born citizens." House Bill 1284's restriction on out-of-state ownership of both real and personal property violates this standard.

Second, Article II, Section 25 of the Colorado Constitution governs due process and equal protection. While Colorado has no express equal protection clause identical to the Federal Constitution's, the Colorado Supreme Court has, in multiple cases, upheld the rights of individuals to be protected against "arbitrary and capricious" discrimination, concluding that individual rights are afforded equal protection under Article II, Section 25.

House Bill 1284's failure to survive even a most generous analysis under Hicklin or any of the other cases cited above, ultimately renders it not only unconstitutional, but also arbitrary and capricious, and thus actionable under the Colorado Constitution as a violation of protected rights.

II. RESIDENCY-BASED DISCRIMINATION, AS PROPOSED, VIOLATES PROHIBITIONS AGAINST RETROACTIVE BUSINESS AND/OR ECONOMIC TAKINGS, AND MAY RESULT IN COMPENSABLE DAMAGES FOR DISLOCATED INDIVIDUALS AND ENTITIES.

Under the Fifth Amendment to the U.S. Constitution, citizens are protected against any taking of property absent sufficient public need, and upon the government demonstrating this need, the property owner must be provided an award of just compensation. While a complicated legal framework interpreting these rights has subsequently emerged, a regulatory taking in Colorado is considered to have taken place when a governmental entity regulates a property or business in such a way that the regulation removes the owner's full and complete ability to operate his or her business or the total ability to use the impacted property for business purposes. In such situations, owners can be compensated.

Here, individuals dislocated and/or forced to cease operation of the businesses due to residency discrimination shall be considered to have a vested property right, and ultimately may qualify for compensation under C.R.S. 24-68-105. In addition, under C.R.S. 38-1-101, individuals may be compensated due to the retroactive enforcement of the state's new rules, as the statute requires that "Notwithstanding any other provision of law to the contrary, a local government shall not enact or enforce an ordinance, resolution, or regulation that requires a nonconforming property use that was lawful at the time of its inception to be terminated or eliminated by amortization."

In December 2009, one of the above statute's sponsors, Sen. Bob Hagedorn, D-Aurora, testified in a medical marijuana zoning case. He argued that the legislative intent of the law shall be construed in such a way as to prevent the retroactive takings of medical marijuana businesses, or in the event such takings are justified under a public necessity analysis, dislocated business and property owners shall be compensated. See McPhee, Mike. "Laws Clash in Medical Pot Suit," Denver Post, Dec. 19, 2009, at http://www.denverpost.com/news/ci_14030017.

While the State can try to argue here that such businesses were not authorized under prior law, and therefore, dislocated owners do not lawfully hold a vested property right, this argument is extremely vulnerable. Dislocated owners can demonstrate prior lawful operation and approval by state and local agencies. Documentation includes state and local business registration, wholesale/retail sales tax licenses and receipts, and local zoning approval. In addition, owners can also demonstrate that they were acting in accordance with a November 2009 opinion by Attorney General John Suthers to Gov. Bill Ritter identifying medical marijuana as "tangible property that is generally subject to state sales tax," and also mandating that medical-marijuana dispensaries must obtain retail sales tax licenses from the state to operate their businesses.

III. DRAFT EMERGENCY RULE, WHILE GENERALLY COMPLIANT WITH HOUSE BILL 1284'S MANDATED DISCRIMINATION CLAUSE, MUST BE IMPROVED.

To eliminate the risk of successful and imminent litigation challenging residency-based discrimination, the rulemaking process must not codify any discrimination that fails under the above legal frameworks. While we are encouraged about the Department of Revenue's acknowledgment that promissory notes and property ownership by non-residents can survive House Bill 1284's residency requirement, we encourage the State to reconsider its current position about permissible interest rates for promissory notes between in-state and out-of-state parties. According to our latest communications with your agency, the State is instructing such notes to cap rates of return at 12 percent. In the absence of adopting this guidance, the State has indicated that higher rates may trigger additional inquiries from the State.

This rate cap is arbitrary and capricious, as it bears no reasonable relationship between current commercial lending rates, which are experiencing wild swings and under which demand for credit still grossly outweighs supply. As applied to the medical marijuana industry, a 12 percent cap is even more concerning. As national and state media reports have documented in recent months, many medical marijuana businesses are seeing their bank accounts shut down and lines of credit cancelled. Many of our clients have no choice other than to turn to private lenders and investors. Given continuing concerns about federal law, including possible criminal liabilities for lending, any private entity or individual supplying funds to a medical marijuana business faces a much greater risk than a conventional private lender. We encourage the State to reconsider this cap and consider a new rate in light of current lending realities. A rate at or even above 20 percent is reasonable.

IV. CONCLUSION

In closing, we reiterate our strong opposition and concerns about any residency-based discrimination being codified in the rulemaking process. While the Department of Revenue should be lauded for its transparency, and is procedurally limited under administrative law in terms of its powers to reject any residency ban, it should also be aware that House Bill 1284's residency restrictions are unconstitutional. Shall the State, either through its administrative agencies, its Office of Legislative Legal Services, or its General Assembly, fail to craft alternative policies that treat all citizens equally, we will act in the best interests of our clients, as well in a way that will best protect the constitutional rights of all Coloradans and non-residents, in pursuing litigation.

Thank you for your attention to our concerns. We look forward to communicating further with you at today's hearing, and welcome you to contact us with any further questions, comments, or concerns. We very much see the rulemaking process as a collaborative endeavor, and hope you will rely on us as an information source whenever and wherever needed.

Sincerely,

/s/ Jessica P. Corry Special Counsel Hoban & Feola, LLC

/s/ Robert T. Hoban Partner Hoban & Feola, LLC


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