What follows below is the abbreviated text of my letter to Will Humble dated February 18, 2011.  You may also read or download a copy of the actual letter.

February 18, 2011

Will Humble, Director
Arizona Department of Health Services
150 N. 18th Avenue
Phoenix, AZ 85007

Re:  Comments to the Arizona Department of Health Services’ Proposed Rules to be Promulgated Under Arizona Revised Statutes Section 36-2801, et. Seq., Arizona’s Medical Marijuana Laws

Dear Mr. Humble:

I am the creator of a website called “Arizona Medical Marijuana Law” found on the internet at www.arizonamedicalmarijuanalaw.com. The purpose of this website is to inform the public about the new law created by the voters’ approval of Proposition 203. Although this new website is just shy of seven weeks old, it will have close to 20,000 visitors this month because it contains a treasure trove of information about this new law.

I am an Arizona attorney who has been practicing business law in Arizona since 1980. Since I started counting in 2002, I have formed over 3,000 Arizona limited liability companies, for profit corporations and nonprofit corporations. As of the date of this letter, I have been hired by more than 30 groups that intend to apply for a dispensary registration certificate. What follows are my suggested changes and comments to the proposed Rules.

1. The Lottery. Eliminate the lottery and replace it with a selection system based on the quality of the application and the applicant. Our country has been a country where people succeeded on merit, not on government give-aways. DHS should pick the applicants that are best qualified and most likely to operate a successful business. The people of Arizona deserve the best dispensary owners, not a group of winners who are lucky to have their names drawn out of a hat. The application fee of $5,000 is sufficient to pay for a review and analysis of each application. State in detail the criteria on which applications will be graded. Create a point system and say that dispensary registration certificates will be awarded to the top 124 scores. Provide in the Rules that if any of the 124 applicants selected for a license fails to actually obtain its dispensary license within one year, the dispensary registration certificate will be revoked and a new dispensary registration certificate be offered to the applicant whose total score was 125th and go down the list if other entities fail to open their dispensaries within the designated time period.

I submit to you that selecting dispensary owners by a lottery is the surest way for DHS to get sued and to cost the State of Arizona a large amount of defense money it does not have. The current Rules are totally lacking in any guidance or requirements for conducting a lottery. Here are just a few of the almost unlimited problems with a lottery:

  • There are no detailed Rules on exactly what applicants must do to be eligible for the lottery. Currently the Rules provide that the application must include a business plan. One applicant might submit a 50  page detailed business plan that involved a great deal of thought and research. Another applicant might submit a one page business plan that has four bullet points and ten lines of text. If DHS discards and does not put into the lottery the application that contained the one page business plan because it is not sufficient, DHS will probably be sued and lose the lawsuit because the Rules do not contain any requirements or guidance on what must be in the business plan. Without any specific requirements for a business plan or policies and procedures on inventory control, the one page bare bones document should not be rejected.
  • R9-17-303.B.5 says the application must be accompanied by: “A sworn statement signed and dated by the individual or individuals in R9-17-301 certifying that the dispensary is in compliance with local zoning restrictions” What does that statement mean? One applicant obtains a lease for a dispensary site in Phoenix in an area that is properly zoned and gets a special use permit from Phoenix. Another applicant obtains a lease for a dispensary site in Phoenix in an area that is properly zoned, but does not obtain a special use permit or even make any filings with Phoenix zoning. Will you reject the application of the second applicant? If so, DHS would once again invite a lawsuit because the second applicant can clearly affirm that the site complies with local zoning restrictions. The current Rules do not expressly state that an applicant must make any type of filing with a city to obtain zoning. It would be a mistake to require applicants to make any kind of filing with a city zoning department unless and until that applicant receives an initial dispensary registration certificate. Why waste the time and money of cities processing hundreds or thousands of zoning applications for entities that will never obtain a dispensary registration certificate.
  • DHS rejects one or more applications because the applications list the same location for the dispensary. It makes sense for a landlord who is willing to lease to a dispensary and whose property is properly zoned to be able to lease the site to multiple prospective tenants with a clause in each lease that the lease will not be effective unless the prospective tenant obtains a dispensary registration certificate. Maybe that landlord has the best facility/location in the CHAA, but the lottery winner has a site in a terrible neighborhood near strip clubs. DHS should want the free market to determine where the dispensaries will be located, not the luck of the draw. The current Rules do not prohibit multiple applications for the same site so if DHS were to reject one or more applications because the applications listed the same site, it would be inviting each of the rejected applicants to sue. Please modify the Rules to let one site be used by multiple applicants.
  • All the details of the lottery must be set out. For example, how will the lottery be conducted? Will numbers be thrown in a hat and selected by Rose Mofford? Will ping pong balls be put in a spinning basket? When will the lotteries be held? Will they be open to the public or televised? It should be open and televised. Any lottery details that are not stated in the Rules will create opportunities for lottery losers to sue DHS.

At this point in my letter I inserted the text of an article posted on www.arizonamedicalmarijuanalaw.com on February 3, 2011, by Anonymous called “Why DHS’ Lottery to Pick 125 Dispensary Winners is a Mistake.”

2. The CHAAs. The CHAAs must be eliminated. Will Humble’s stated purpose for creating the CHAAs is to spread dispensaries throughout the state to reduce the number of private marijuana growers. That may be a reasonable personal objective of Mr. Humble, but his job is not to impose his private beliefs on the people of Arizona contrary to the express language of Proposition 203. The obvious goal of Proposition 203 is to make medical marijuana available to the Arizona patients who need it. The goal of Proposition 203 was not to minimize the number of patients who might grow their own marijuana. Let the free market determine where dispensaries will be located. When government gets involved in commerce as in this case, the end result is higher costs to the consumer/patient. Is DHS aware of the laws of economics and how supply and demand relate to price? When you limit the supply, the demand goes up and so does the price. When the supply goes up, the demand goes down and so does the price. The unintended consequence of the CHAA system will be to greatly increase the price of products to patients who live in the highly populated CHAAs where only one dispensary will be located. Dispensaries in these CHAAs will be free to overcharge their patients because they will not have any competition.

At this point in my letter I inserted the text of an article posted on www.arizonamedicalmarijuanalaw.com on February 3, 2011, by Anonymous called “CHAA on This!“

3. The Medical Director. Eliminate the medical director because it is not provided for in Proposition 203 and the medical director provides no purpose other than to increase the cost for the dispensaries which results in patients paying more to purchase marijuana products. The Rules do not require that the doctor have any training or knowledge about medical marijuana. If the purpose of a medical director was to somehow educate and inform and assist patients using medical marijuana, wouldn’t there be some minimum requirements for a medical director that would be evidence that the doctor has some minimal level of knowledge and experience with medical marijuana and its affects on patients? If DHS insists on having a medical director, it should be DHS’s own medical director who can then create the pamphlets and literature that DHS wants distributed to patients and charge each dispensary $500 a month plus the cost to purchase the literature.

4. Principal Officer & Board Member. Throughout the Rules DHS uses the phrase “principal officer and board member.” The Rules carefully create requirements invented by DHS that are not in Proposition 203 that every principal officer and board member must meet, including, but not limited to the unconstitutional Arizona residency requirement. The residency requirement may get DHS sued after dispensary licenses are issued. Nobody wants to sue before then because they do not want to get on DHS’s “bad actor” list.

Why is the phrase principal officer and board member used 50 times in the Rules, but the Rules do not contain a single reference to the owners of the nonprofit entity. The Rules never mention the owners of a nonprofit entity who are called: (i) shareholders when the entity is a for profit corporation, (ii) partners when the entity is a partnership, (iii) member when the entity is a limited liability company, and (iv) sole proprietor when the business is owned by one person who operates without an entity.

The current Rules regulate only principal officers and board members. As a 31 year business lawyer who has formed and advised over 3,000 Arizona companies, I am familiar with officers of a corporation, but have never heard of a “principal” officer. Please tell us what a principal officer is and how a principal officer differs from a plain vanilla officer?

As a general Rule, only corporations have officers and members of the board of directors. Limited liability companies are run by the members if the LLC is member managed or by one or more managers if the LLC is manager managed. Limited partnerships and general partnerships are managed by one or more general partners. An LLC can create officers and board members, but unlike Arizona corporate law, Arizona LLC law does not provide for either.

The current Rules do not prohibit the nonprofit entity from being owned by a person who has an excluded felony or one or more of the other fifteen requirements contained in the Rules that must be met by all principal officers and board members. Doesn’t DHS want all of the owners of a dispensary to meet the same eligibility requirements as officers and directors? I recommend that DHS amend the Rules as follows:

  • Where ever the phrase “principal officer and/or board member” appears, replace it with “Owner, Officer and/or Board Member.”
  • Include a definition for Owner that states: The term “Owner” means: (i) a shareholder of a corporation, (ii) a partner of a general or limited partnership, (iii) a member of a limited liability company, and (iv) a sole proprietor.
  • Include a definition for Officer that states: The term “Officer” means: (i) a president, vice president, secretary or treasurer of a corporation, (ii) a general partner of a general partnership or a limited partnership, (iii) a manager of a manager managed limited liability company, (iv) a member of a member managed limited liability company, and (v) a sole proprietor.
  • Include a definition for board member that states: The term “Board Member” means a person who is duly appointed or elected to the board of directors of a corporation.

The Rules should expressly state that all of the eligibility requirements applicable to principal officers and board members (as currently worded) apply to all the Owners. If DHS does not intend any or all of those eligibility requirements to apply to Owners, then state which requirements apply or that none of the requirements apply.

5. Independent Contractors. As I read the Rules, every person who enters a dispensary must be a qualifying patient or a dispensary agent. If so, this means that a plumber hired to fix a toilet, an electrician hired to install a new ceiling light, a janitor who cleans the premises and the IT person who installs a new computer must be dispensary agents. This does not make any sense. The dispensaries must be able to hire independent contractors to provide routine, non-medical marijuana related services for their businesses. Please modify the Rules to allow the dispensaries to hire independent contractors for these types of routine services without requiring that every single person be a qualifying patient or dispensary agent.

Sincerely,

Richard Keyt