Sarcoxie Nursery Cultivation Ctr., LLC v. Williams

Decision Date03 May 2022
Docket NumberWD 84492
Citation649 S.W.3d 127
Parties SARCOXIE NURSERY CULTIVATION CENTER, LLC, et al., Appellants, v. Randall WILLIAMS, et al., Respondents.
CourtMissouri Court of Appeals

Joseph P. Bednar, Jr., Jefferson City, for appellants.

Gerald M. Jackson, Jefferson City, for respondent.

Before Division Two: Alok Ahuja, P.J., and Edward R. Ardini, Jr. and Thomas N. Chapman, JJ.

Alok Ahuja, Judge

The Appellants in this case are Sarcoxie Nursery Cultivation Center, LLC, Sarcoxie Nursery Infusion, LLC, Missouri Medical Manufacturing, LLC, Missouri Medical Products, LLC, and GVMS, Inc. The Appellants unsuccessfully applied for licenses from the Department of Health and Senior Services to cultivate, manufacture, and/or dispense marijuana and marijuana-infused products for medicinal purposes. After their license applications were denied, Appellants filed a petition for declaratory judgment in the Circuit Court of Cole County. In their lawsuit, Appellants challenged the regulations which limit the total number of medical marijuana facility licenses the Department will issue. The circuit court rejected Appellants’ challenges, and upheld the Department's numerical limits on licenses. The Appellants appeal. We affirm.

Factual Background

On November 6, 2018, Missouri voters approved an amendment to the Missouri Constitution which legalized the cultivation, manufacture, and distribution of marijuana and marijuana-infused products for medicinal purposes. The amendment is codified as Article XIV of the Missouri Constitution.

Article XIV vests the Department of Health and Senior Services with the authority to

[p]romulgate rules and emergency rules necessary for the proper regulation and control of the cultivation, manufacture, dispensing, and sale of marijuana for medical use ... so long as patient access is not restricted unreasonably and such rules are reasonably necessary for patient safety or to restrict access to only licensees and qualifying patients.

Art. XIV, § 1.3(1)(b).

Article XIV gives the Department authority to administer a licensing program for medical marijuana-related facilities. The Department is authorized to "[g]rant and refuse state licenses and certifications for the cultivation, manufacture, [and] dispensing" of medical marijuana, and to "suspend, fine, restrict, or revoke such licenses and certifications" for violations of Article XIV or the Department's implementing regulations. Art. XIV, § 1.3(1)(a).

Article XIV also gives the Department the authority to "restrict the aggregate number of licenses granted" for medical marijuana cultivation, manufacturing, and dispensary facilities. Art. XIV, §§ 1.3(15)-(17). Article XIV limits the Department's authority in this regard, however: it specifies that cultivation licenses cannot be limited to fewer than one license per one hundred thousand Missouri residents; that licenses for marijuana-infused products manufacturing facilities cannot be restricted to fewer than one per seventy thousand Missouri residents; and that the number of dispensary licenses cannot be limited to fewer than twenty-four in each of the eight United States congressional districts existing in the State as of December 6, 2018. Id. The 2010 United States Census reported that the population of Missouri was 5,998,927. Given the 2010 Census data, the parties agree that Article XIV prohibited the Department from authorizing fewer than: sixty licenses for cultivation facilities; eight-six licenses for marijuana-infused product manufacturing facilities; and 192 licenses for dispensaries.

After Article XIV was passed by voters, the Department sought public input and guidance from a wide variety of individuals and groups before beginning the formal regulatory process. Department officials testified at trial that they had an "open-door policy" which permitted "anybody ... to submit their thoughts and ideas," without regard to whether a lobbyist or attorney was involved. The Department posted various drafts and revisions of its contemplated rules on its website, and issued press releases alerting the public when a new version of the rules was published. The rules were also sent to other agencies and to stakeholder groups for comment.

In May 2019, the Department proposed three regulations which limited the total number of licenses for cultivation facilities to sixty, the total number of licenses for marijuana-infused products manufacturing facilities to eighty-six, and the total number of dispensary facilities to 192 – the minimum number of licenses required to be issued by Article XIV, §§ 1.3(15)-(17). See 44 MO. REG . 1911, 1914, 1922 (July 1, 2019) (proposing rules to be codified at 19 C.S.R. 30-95.050(1)(A), 30-95.060(1)(A), all 30-95.080(1)(A)-(B)). The regulations provided that the limits could be increased in the future "in order to meet the demand for medical marijuana by qualifying patients." Id. The three regulations were promulgated as emergency rules effective on June 3, 2019. See 44 MO. REG . 1818-19, 1822 (July 1, 2019). The final regulations became effective on January 30, 2020. See 44 MO. REG . 3142-43 (Dec. 2, 2019) (Orders of Rulemaking).

Department officials testified at trial that they were required to build a new regulatory agency and regulatory framework "from scratch," and on the expedited timetable dictated by Article XIV. The Department investigated the experience of other States which had legalized marijuana for medical or recreational purposes. The Department recognized that it could not simply take data from other States and directly apply it to Missouri, but found the out-of-state information to be "helpful" nonetheless. Department officials testified that they looked to other States, such as Colorado and Oklahoma, which had opened their marijuana marketplaces with minimal regulations. Missouri officials considered Oklahoma's experience, in particular, to have been "a disaster." They testified that Oklahoma is "going through it right now, trying to put the genie back in the bottle [because it did not] start from a well-regulated, controlled system." The Department thus adopted the mindset that "[it] can make the incision bigger, but [it] can't make it smaller."

Department officials testified that their "North Star" in developing regulations was patients, and ensuring that they had sufficient access to safe medical marijuana. The Department considered the competitiveness of dispensaries, geographic factors, and economic considerations in determining whether the regulations would afford sufficient patient access to medical marijuana. Given Article XIV's emphasis on patient access, Department officials questioned whether it was appropriate to put any numerical limits on licenses. However, Department officials testified that an additional "major concern" was preventing the diversion of excess medical marijuana into the already-existing black market, which the Department has a "regulatory duty to ... prevent." See Art. XIV, § 1.3(1)(b).

To assist it in formulating its rules, the Department commissioned a study from economists at the University of Missouri to estimate supply and demand. The market study, known as "the Haslag study," looked to other States to provide estimates on both supply and demand within the Missouri market.

The Haslag study estimated with 66% percent confidence that the number of patients seeking access to medical marijuana products in the first year of the program would be approximately 20,000.

Following their own investigations, however, Department officials concluded that the Haslag study had substantially underestimated the likely patient population, and "didn't align with what [the Department had been] hearing." The Department instead based its "demand" estimates on a figure "heard from multiple sources," that a "robust medical marijuana market would be about 3 percent of the population." The population of Missouri as of the 2010 United States Census was 5,998,927; based on that figure, the Department estimated that approximately 180,000 Missourians would become patients. The Department assumed that all 180,000 patients would purchase the maximum allowable quantity of marijuana, or three pounds per year, even though it expected that approximately one-third of patients would engage in the home cultivation authorized by Article XIV.

Because the Department concluded that the patient-population and demand projections in the Haslag study were substantially understated, it adopted license limitations substantially higher than the number of cultivation, manufacturing, and dispensary facilities which the Haslag study opined would be necessary to satisfy patient demand through 2022.

Although it did not rely on the Haslag study's estimate of marijuana demand, the Department relied on the Haslag study's information concerning the "supply side," particularly its estimate of the per-square-foot production capacity of marijuana cultivation facilities. The study indicated that "indoor cultivators would be capable of producing .5 pounds per square foot annually."

The Department applied that productivity estimate to the minimum number of cultivation facilities required to be licensed by Article XIV, or sixty facilities. Assuming each facility operated at its maximum allowable capacity of 30,000 square feet, sixty facilities would produce approximately 900,000 pounds of marijuana annually. At trial in October 2020, Department officials testified that their more recent projections were tracking with the pre-rule estimates of production from cultivation facilities.

Given the potential for significant excess supply, Department officials testified that they did not believe that limiting the number of cultivation licenses would have the effect of unreasonably limiting patient access. They testified that the Department would "continuously or periodically"...

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