Why DHS’ Lottery to Pick 125 Dispensary Winners is a Mistake

I believe that the proposed AZDHS rule whereby the Department will allocate Medical Marijuana Dispensaries to applicants by lottery is a big mistake, for the following reasons:

• The rules require an applicant to submit a number of items with their application. Included are a business plan, an inventory plan, a security plan and other items. The Department might receive an application from one applicant including a business plan that is thorough and persuasive concerning the likely success of the applicant’s proposed operation of a dispensary. Another applicant might submit a sheet that says “Business Plan” at the top, but which contains little that is helpful or persuasive concerning the applicant’s likelihood of success. Since the Department’s rules contain nothing to help evaluate or rate or differentiate between the 2 submissions, each will be entitled to be submitted with an equal chance to be chosen from the lottery. (assuming some form of the other required items have been included with each application.)

• The fact that, per the proposed rule, the business plan and other required submissions will not be read, evaluated or scored renders the required submission of those documents meaningless.

• The Department is charging a fee of $5,000 to file an application. Only $1,000 would be refunded to an applicant who submitted a complete application and whose application was therefore submitted to the lottery. People have speculated that 2,000 or more applications could be filed. If 2,000 applications were submitted at $5,000 each, the gross would be $10,000,000. If every one of the applications were complete (unlikely), 1,875 refunds of $1,000 each ($1,875,000) would need to be made. The net would be a minimum of $8,125,000. Since some of the applications would likely be incomplete and the applicant would not receive a refund, the net would probably be even more. With this large amount of funds, certainly the Department should have the resources to read, evaluate and score the applications received.

• If AZDHS awards the right to obtain a license to an obviously unqualified applicant because AZDHS has been unwilling to read, evaluate and score the applications received, even though it has received millions of dollars in application fees from applicants, it will subject itself to legal action by qualified applicants who were denied the right to obtain a license or even the opportunity to have their applications and evidence of qualifications evaluated.

• The lottery proposal encourages gaming of the system or even fraud. I have heard of groups who intend to submit 20 or more applications. A group of investors could file applications by each of the individuals in the group with an agreement that if any of them were successful, the unsuccessful individuals would be brought into partnership with the successful applicant. There could even be straw applicants submitting applications on behalf of undisclosed principals. All of this would be incentivized by the unwillingness of the Department to read, evaluate and score the applications received.

• The people who drafted the ballot measure made a great effort to make the Arizona Medical Marijuana system subject to comprehensive and sensible regulations in order to avoid some of the “free for all” problems occurring in some of the other States that have previously allowed Medical Marijuana. Providing a system where applications and the attached submissions are read, evaluated and scored will result in the most qualified applicants being chosen for the limited number of licenses. Refusing to evaluate the applications will promote the opposite, leading to instability in the industry and problems for law enforcement the public and the Agency.

• If unqualified applicants are chosen by lottery for the right to submit the additional items necessary to receive permission to operate, and are unable to perform because they lack the resources or are incompetent, the dispensary permit could sit idle for a year until the next opportunity for the Department to receive applications. This would deny the public access to a dispensary in that area and would allow patients with cards to grow their own medical marijuana if they were more than 25 miles from the closest other dispensary.

• Awarding licenses to unqualified applicants will likely cause problems with patient services as well as unpaid bills and other problems related to failure of dispensary businesses due to lack of qualifications of the applicants.

• If the Department is unwilling to evaluate the suitability and qualifications of the applicants, it should at least require a bond or a posting of a cash deposit, to guarantee performance by a successful applicant. This should be required as a condition of submitting the initial application.

• The nature of the business as well as the regulations imposed by the Statute and the Agency rules guarantee that it will be expensive to open and operate a dispensary. If a prospective applicant does not have the financial resources to be able to successfully open and operate a dispensary, he or she should get the backing of someone who does. This is no different from any other business opportunity. While those without resources might complain that it is unfair to deny them the chance to receive a license, it is just as unfair to choose someone without the qualifications, competence and resources necessary to be successful, on the basis of a “game of chance” over someone who has the qualifications, competence and resources required to be successful. It is also unfair to the public who will be using the services of dispensaries to impose upon them, based on a “game of chance”, prospective dispensary operators who are not likely to be competent and/or successful in providing good service to the patients.

• If the State of Arizona wanted to have a low regulation industry and let the market choose the winners and losers, it could do that. Arizona has not made that choice, though. Arizona has chosen a highly regulated system involving very limited access to licenses. The regulations imposed by the State increase the resources and competence required to operate successfully. With this type of system, the State Agency has the responsibility to do what is necessary to increase the odds that the very limited number of business opportunities will be given to those who are likely to be able to perform.