Among the 185 cannabis dispensary licenses recently awarded by the Illinois Department of Financial and Professional Regulation (IDFPR), 75 were reserved for top-scoring applicants in what was intended to be a competitive licensing process.
The dilemma?
KPMG, the global accounting firm that IDFPR bestowed a no-bid contract worth $4.2 million to grade the applications, awarded 21 groups perfects scores. In turn, the 75 licenses reserved for the top-scoring applicants were to be divvied up among those 21 groups. Overall, 937 candidates submitted 4,518 applications seeking those 75 licenses, according to the Chicago Sun Times.
While there was a cap on how many licenses applicants could win, which was 10, there was no cap on how many times applicants could apply. The 21 groups with perfect scores collectively submitted more than 300 applications.
The kicker?
Five of the 250 points necessary to receive a perfect score were reserved for applicants with businesses that were majority owned by military veterans, essentially providing veterans a monopoly over those licenses, said Irina Dashevsky, a partner in the cannabis law practice group at Greenspoon Marder.
Perfect Scores
Dashevsky and her team at Greenspoon are involved in litigation in a Cook County case that is currently challenging the five veteran points and their constitutionality. It’s just one of many cases currently unfolding in a licensing saga that began in early 2020. The IDFPR cannot issue actual licenses to the lottery winners with a current court order blocking the rollout.
“What ended up happening in practice, which was unprecedented, is perfect scores,” Dashevsky said. “So, IDFPR hired KPMG, and KPMG gave out perfect scores, and perfect scores to my knowledge still had never existed before in any cannabis licensing contest in any jurisdiction. So, whether it’s medical or rec, whether it’s Illinois or somewhere else, perfect scores weren’t really a thing.
“And it’s surprising that they were a thing here, right? Like, how do you say someone’s business plan is perfect or someone’s operations plan is perfect? It’s suggested that there wasn’t a good amount of scrutiny on that. And then the idea that not just one was perfect, 21 were perfect, is at least curious and unprecedented.”
Since those 21 perfect scores were revealed more than a year ago—on Sept. 3, 2020—the scoring system and its application have come under fire. In addition, an employee who works as a risk management consultant for KPMG is also a partner in one of the 21 groups that secured perfect scores, the Chicago Sun Times reported, leaving the integrity of the process in question.
The Intended Process
In a competitive application process with competitive scoring, applicants who did not pick up the five points because of a lack of veteran ownership, but were perfect elsewhere, could still have scored as high as 98% and should not have been shut out, Dashevsky said.
“Those five veteran points literally became critical and many [applicants], based on what was proposed, thought, ‘OK, it’s just five points out of 250,’” she said.
Dashevsky said she believes the 75 licenses weren’t intended to be reserved for perfect scores. In addition, the notion of a lottery, as outlined in the state’s Cannabis Regulation and Tax Act (CRTA), was originally written as an emergency tiebreaker rule, she said.
For example, if two applicants both received 90% scores in a tie for the final license available from their Bureau of Labor Statistics (BLS) region, then those two applicants would have a lottery between just them to decide the winner of that specific license.
“But here, because of perfect scores, you had a tie for all [75] licenses,” Dashevsky said. “I think the issue here is that you can do anything you want, but what you should not have done is passed and written this complex, 700-page piece of legislation that put forth a very competitive licensing process and have that culminate in nothing more than an all-in lottery.”
Marshaling Perfect
Dashevsky said she and her team remain curious about why some groups submitted more applications than 10—the cap for how many licenses they could potentially win—unless they knew in advance that a lottery provision would be triggered and extra submissions would essentially be lotto balls in a random drawing.
After the scoring was called into question from within the legal realm, Gov. JB Pritzker and the IDFPR issued a supplemental deficiency notice process, which allowed applicants to receive notice of where they lost points and the opportunity to fix those points. But applicants could not go out and reconfigure their ownership status to satisfy the veteran-owned or Illinois resident points since they did not apply for those points from the outset.
Allowing for amended applications was basically a corrective process marshaling folks, who had lost points elsewhere, toward perfect scores, Dashevsky said. But Pritzker and IDFPR faced an apparent lose-lose situation, as three of the original 21 finalists for the dispensary licenses filed a lawsuit over the state’s decision to give losing applicants a second chance.
Nonetheless, the corrective process eventually allowed more groups beyond the original 21 to eventually achieve perfect scores and become eligible for the original 75 licenses.
Lowering the Bar
That all happened in September and October 2020. Navigating through months of lawsuits and delays, the IDFPR eventually unveiled a plan in late April to roll out the 75 original retail licenses in conjunction with 110 new licenses for applicants scoring 85% or better. The five veteran points were still in play for the 110 licenses, but they were no longer a be-all and end-all.
Lotteries transpired on July 29 and Aug. 5 for the 110 licenses, while a third lottery for the 75 original licenses was held Aug. 19.
“So, the legislative fix was adding two more lotteries and setting a lower bar to get into those lotteries,” Dashevsky said. “They set a bar at 85%, which I was against, and we argued that that very much undermines the competitive nature of the whole thing, right? Like, on the one hand, you’re giving out perfect scores and giving out licenses to people who are absolutely perfect. And the other hand, you’re giving out that same license to anyone who achieved 85% or better.”
Part of the equation set forth in the CRTA was that 20% of all available points in the process would go to social equity applicants with the focus of righting past wrongs caused by the drug war. In turn, partnerships were created with social equity applicants to achieve those points, Dashevsky said.
Veteran Monopoly
While the 110 additional licenses helped diffuse the perfect-score quandary, the 75 original licenses still created a veteran-owned monopoly, she said. While veterans represent roughly 6% of Illinois’ adult population, Dashevsky said, they took control of 40.5% of the 185 new licenses.
“And the question is why—why such a windfall for veterans?” she said. “What we do understand is why social equity applicants deserve this boost. Why veterans? And we’ve argued in our case there’s no rational basis for giving veterans these five points or anything.”
Veterans often return home after sacrificing life and limb for their country without asking for anything in return.
Some of them receive VA health care for service-connected injuries. Some of them receive special loans for home mortgages or college tuition through the GI Bill. Some of them get special preference in hiring for government employment. And some veterans receive access to military exchanges or retail discounts at places like their local hardware shop.
Many of them also receive respect from their fellow citizens and are recognized during Armistice Day every Nov. 11.
“Look, no offense to veterans. In fact, thank you veterans,” Dashevsky said. “But in this regard with respect to retail ownership of cannabis dispensaries in Illinois, there is no rational basis for why you should have a boost versus some other group.”
In arguing that the Illinois adult-use retail licensing points for veterans is unconstitutional special legislation, Dashevsky and her Greenspoon Marder team are making a case that the government is supposed to create laws that apply to everyone.
“If they’re going to create a law that singles out a group for a particular reason, there has to be at least a rational basis for it,” she said. “Usually, veterans get perhaps special preference in hiring in government employment. That’s typically where that special preference has been upheld.”
Illinois licensing officials have broadly said that veterans suffer from PTSD—one of many qualifying conditions under Illinois’ medical cannabis program—and that’s relevant to the five veteran points, Dashevsky explained.
“We have been saying it’s not relevant to retail ownership, and you’re not helping veterans broadly,” she said. “You’re helping a handful of veterans have ownership in an industry, but what does PTSD have to do with retail ownership?”
Licensing Remedies
In the meantime, the IDFPR did admit to a clerical oversight error on data entry that wrongfully excluded applicants from the three-part lottery process and announced earlier this month its intentions to hold a corrective lottery to rectify the slipup by awarding additional adult-use licenses.
But the IDFPR will not hold that corrective lottery or any others until court approval and cannot formally issue licenses to the 185 winners unless Cook County Circuit Judge Moshe Jacobius lifts a standing order blocking the rollout. During an Aug. 16 hearing, Jacobius said there was a possibility the state would have to redo its entire lottery process.
Through the administrative review law period, which is 35 days from the final announcement of license winners, the IDFPR has indicated its willingness to have separate remedies for anyone who’s successful through that review, Dashevsky said.
“I don’t know whether judges will agree with that all around, and that is not withstanding the veteran issue,” she said. “Our argument has always been that everyone who achieved a 245, which is a perfect non-veteran score, should have been in lotto three [on Aug. 19].”
But Dashevsky said she doesn’t know if the right answer would be to redo the entire lottery or to include all the perfect non-veteran scores in a supplemental lottery with similar odds.
“I think judges are in a tough place, but I don’t think they need to think about the remedy,” she said. “I think they need to just focus on the constitutional question with respect to the veteran points. But a lot of time and resources were put into these lotteries and getting folks to this place and we’re already quite delayed. So, I think you’ve got to kind of balance all that out.”
Lessons learned
Pursuant to the amended CRTA, the IDFPR can award up to a maximum of 500 adult-use dispensary licenses. The department stated it intends to award 50 more in 2022.
With the current saga involving the 75 original licenses getting dragged out well beyond a year, there are lessons that other states could learn from Illinois, especially when it comes to varying extremes seen in current medical markets—from Oklahoma’s unlimited licensing system to Florida’s limited-license market that’s majority controlled by a few multistate operators.
While Greenspoon Marder is challenging the constitutionality of veteran points in the Illinois licensing process, Dashevsky said she applauds the IDFPR’s efforts.
“I think that what Illinois did and attempted to do and is still striving to do is extremely commendable,” she said. “The legislation itself is a blueprint. I think the application process and how it all rolled out is a little different, but Illinois attempted to strike a balance and give a boost to social equity applicants. And I think that it’s in the process of perhaps achieving that.”
Dashevsky concluded and said, “I think that it’s tough to have such a competitive licensing process turn into essentially lotto balls, but it is what it is. I don’t think other states should be looking to this and saying, ‘Let’s do a lotto.’ That wasn’t ideal. That’s not really what was put forth here. It’s a little messy and it’s not merit-based.”
States that want to achieve an equilibrium between the number of licenses issued and who wins those licenses must tiptoe a fine line to get there, she said.
