By Jeff McCourt and Aaron Mendelsohn
Late last week the Ohio ballot board certified a constitutional amendment (the “Amendment”), proposed by Ohioans for Medical Marijuana (“OMM”), to create a comprehensive regulatory program for the provision and sale of medical marijuana in Ohio (the “MMJ Program”). This was the last step that OMM needed to launch its statewide signature gathering campaign, and the group now has until just after the 4th of July holiday to gather 305,591 signatures from voters across Ohio in order to put the Amendment on November’s general election ballot.
This following is a summary from a larger article that focuses on the key structural and economic components of the MMJ Program that, if passed, would be of most interest to prospective patients and market participants. As the campaign progresses, we will provide further detail on other aspects of the Amendment as well as its potential intersection with medical-cannabis legislation currently being considered in the Ohio Statehouse.
To download the complete article, click here.
Context and Path Forward.
Numerous polls over the past year suggest that Ohioans overwhelmingly support some form of patient access to medical cannabis, and that an initiative such as the Amendment would likely pass as long as it is not saddled with controversial provisions. Given the high-profile flameout of last year’s Issue 3 ballot initiative (which failed, largely because it allocated to Issue 3’s funders the only 10 cultivation licenses allowed by the proposal) and the legislative counterpunch of Issue 2 (which passed, largely because of public perception that it would prevent the cultivation oligopoly envisioned by Issue 3 and other similar ballot initiatives in the future), OMM made a curiously bold strategic choice by including in the Amendment a 15 license cap on the number of large cultivation facilities.
This single provision could hand the ballot board exactly the type of ‘hook’ it needs to label the Amendment as violative of Issue 2, which would then require voters to approve not only the Amendment but also a separate ballot question that directly states the Amendment violates the Ohio Constitution because it grants a “monopoly, oligopoly, or cartel” not generally available to others. While we have not seen polling on how this separate ballot question might impact the outcome of prior polls that asked for voters’ opinion on medical cannabis, logic and the result of last year’s vote on Issues 2 and 3 suggest that adding this Issue-2 question to the Amendment could generate a significantly different reaction from voters. Based on the questioning and commentary from ballot board members during the March 31, 2016 meeting at which it certified the Amendment, the fact that the Republican-led Ohio legislature is currently considering its own potentially competing medical cannabis legislation, and the overall political context of the Amendment during the general election, it seems likely that the conservative-controlled ballot board will seek to tack the Issue-2 question on to the Amendment if OMM gathers the signatures to put it on the ballot. While OMM would have solid arguments for challenging a decision by the ballot board to invoke ‘Issue 2 treatment,’ the conservative-leaning Ohio Supreme Court has exclusive jurisdiction over such challenges, and the language of Issue 2 grants the ballot board wide latitude to make this determination. It seems reasonably likely, therefore, that if OMM succeeds in putting the Amendment on the November ballot, that Ohio voters will also be asked to approve an Issue 2 question in addition to the Amendment.
Adding further complexity to the political landscape for the Amendment, members of both parties in the Ohio legislature are actively contemplating their own version of medical-cannabis legislation, and could move legislation quickly through committee to enactment by this summer (see our blog posts here, here and here). If the legislature is able to point to a well thought-out medical-cannabis system (the argument goes), it may be able to dissuade some voters from supporting a potentially broader market envisioned by the Amendment. Conversely, the legislature will also want to be careful in designing a program that won’t be rendered entirely useless if the Amendment passes.
Even after factoring in the likelihood that OMM will have to pass both the Amendment and an ‘Issue 2’ approval and that the legislature will likely adopt a more measured medical-cannabis program in the interim months, the Amendment should still have a decent chance of passage if OMM can gather the signatures to put it on the ballot and support it with an aggressive public education campaign.
For Ohio residents considering operating or investing in a medical cannabis business, the MMJ Program could provide access to a large pool of potential patients and present significant new-market business opportunities. Industry experts outside of Ohio with cannabis-consulting businesses should also find ample opportunities to collaborate with Ohio medical marijuana establishments (“MMEs”) licensed under the MMJ Program. The Amendment contains several provisions that could cause heartburn for some prospective market participants, however, such as entrepreneurs oriented to the ‘connoisseur’ or ‘craft’ end of the market as well as out-of-state businesses and investors looking for equity ownership.
If adopted by voters this November, the following elements of the MMJ Program should be of particular interest to potential market participants:
- Speed to Open – The MMJ Program should be open for patients to register and for certain business to open by as early as August 1, 2017, with storefront dispensaries open to patients by late Q1 2018. A year-and-a-half from passage may not sound like warp speed to potential patients, but this would be a very quick startup period based on recent experience in other states. Arizona and Massachusetts, for example, took just over two years from constitutional amendment to licensure of their first dispensaries, while Nevada took over 15 years (though under different procedural circumstances).
- Broad Patient Access – Comprehensive qualifying conditions are included, perhaps most notably “severe debilitating pain” and “severe nausea,” which should provide a fairly broad patient pool with access to medicinal cannabis. The Amendment does not go as far as states such as California and Massachusetts, which allow doctors to determine the debilitating conditions for which they deem medical cannabis appropriate. But the Amendment does allow the Medical Marijuana Control Division (the “Division”), created by the Amendment to administer the MMJ Program, to add additional qualifying conditions as it sees fit.
- Reciprocity – The Amendment also provides a form of “reciprocity” whereby nonresidents can purchase medical cannabis if they are registered in another state’s medical-cannabis program and their debilitating medical condition (as defined in Ohio) would allow them to qualify in Ohio. This could be an important feature for attracting residents of Ohio’s three most populous neighboring states (Michigan, Illinois and New York), each of which have legalized medical marijuana but have not yet allowed for meaningful patient access and/or functioning commercial-distribution systems.
- Homegrow Access – “Homegrow” will be permitted, with up to six plants per patient. Patients who cannot or don’t want to grow their own medical cannabis can specify a “designated caregiver” to grow up to the patient’s limit on their behalf. A designated caregiver can serve up to five specified patients (30 total plants). This type of patient-caregiver has served as the foundation of the medical-cannabis industry since California legalized medicinal use 20 years ago and is thought to be a source of innovation and evolution of ‘connoisseur’ applications within the ‘CannaTech’ space.
- Local Controls and Community Benefits – The MMJ Program includes both state and local licensing components that will allow for extensive participation (up to the point of total bans) by local governments and communities. The Amendment requires certain application-evaluation criteria that consider how the benefits of the MMJ Program are being shared among disadvantaged populations and whether dispensaries will provide reduced-cost medicine for low-income patients.
- Ohioans Only (for 2 years) – Ohio residents will have at least a two year head start (until January 2020) to build their brands and businesses before nonresidents can start investing in and controlling Ohio medical marijuana establishments (“MMEs”). Out-of-state investors looking to participate in the Ohio market as well as some in-state operators seeking outside investment are likely to have a different perspective on this provision.
- Federal Compliance – The Amendment will quickly create a “robust” regulatory regime that, assuming faithful implementation by the parties involved, should easily satisfy the ‘Cole Memo’ criteria for non-enforcement of the federal Controlled Substances Act by the Department of Justice and Drug Enforcement Agency. This is essential for creating an environment where patients and businesses can operate without fear of raids and asset seizures by law enforcement.
Conversely, the following provisions could present significant barriers to entry for would-be market participants, particularly local entrepreneurs looking to enter the ‘connoisseur’ or ‘craft’ end of the cultivation market as well as out-of-state businesses and investors.
- Fees and Limits on Large Cultivations – The costs associated with large “Type 1” cultivations (“Type 1 Grows”) – up to $500,000 initial and annual fees – and the limited number of licenses available – up to 15 – could create substantial barriers to entry for smaller cultivators and allow the holders of these licenses to quickly capture most, if not all, of the potential cultivation market. The upfront and annual fees for all other types of MMEs, including the smaller “Type 2” cultivations (“Type 2 Grows”) are up to $5,000 initially and annually, which are relatively affordable compared to other states.
- Capital Requirements for All Cultivations – Aside from the upfront and annual licensure fees, perhaps the most restrictive aspect of the Amendment will be the substantial capital requirements that it establishes for cultivation applicants (both Type 1 and the smaller Type 2 Grows). Cultivation applicants will have to show that they have sufficient capital “available” to pay their license fees and to build and operate the grow for one year without revenue. In addition, this capital must have been “seasoned” (a term the Amendment does not define or explain) for 180-days prior to the application. While other states have used financial criteria to assist in determining the bona fides of applicants in a competitive licensure process, these provisions go beyond most other states and could create insurmountable financial hurdles for small businesses and entrepreneurs seeking to enter the market.
- Controlling Ownership Restrictions (and Ambiguities) – The Amendment provides ownership restrictions applicable to cultivations (Type 1 and Type 2 Grows) and testing facilities. The cultivation ownership restrictions are intended to limit cultivators to ownership of just one Type 1 or Type 2 Grow license, in an effort to preserve the intent behind the canopy-size limitations (25,000 sq. ft. for Type 1 Grows and 5,000 sq. ft. for Type 2 Grows). Testing facilities are required to not have common ownership with any other type of MME, in an effort to encourage independence from the customers they test. The “controlling person” definition, however, appears to be drafted in a way that could allow applicants to avoid these restrictions altogether through simple legal structuring. We trust the Division will be sufficiently motivated and legally empowered to address these potential ‘loop-holes’ in developing its detailed regulations for cultivation and testing facilities. These ambiguities are discussed in more detail below.
The combined impact of these three provisions could result in the ‘upstream’ cultivation market being dominated by the holders of the 15 Type 1 Grow licenses. This may feel like de-ja-vu for those critical of last year’s failed Issue 3 proposal. Some balancing factors in the Amendment may help to mitigate this impact, however, which we discuss in more detail below.
To download the complete article, click here.
Disclaimer: As with all of our publications, we remind you that we are providing this analysis for general informational and educational purposes, to help advance a general understanding and discourse around cannabis law and regulated industries. This article does not provide legal advice or create an attorney-client relationship. Perhaps most importantly, please remember that the use, possession, distribution and sale of marijuana remain crimes under both federal law and the laws of Ohio. This publication does not, and should not in any way be construed to, assist anyone in violating applicable law.
 Jeff McCourt is an associate in our Corporate & Securities group in our Cleveland office, where he focuses on counseling emerging-growth companies and venture capital and private equity funds in a variety of business and finance matters. He can be reached at 216-363-4428 or firstname.lastname@example.org.
 Aaron Mendelsohn is an associate in Benesch’s 3iP group in our Cleveland office, where he focuses on technology transactions, data security and privacy compliance. He can be reached at 216-363-4635 or email@example.com.
 OMM is the state-level political action committee of the national cannabis-prohibition reform organization, Marijuana Policy Project (“MPP”) based out of Washington, DC. MPP has organized several successful campaigns over the past decade, including the 2012 campaign that legalized adult ‘recreational’ cannabis sales in Colorado and the 2008 Michigan ballot initiative, which legalized medicinal cannabis for Ohio’s northerly neighbors. According to OMM’s website, the campaign will need to raise $6 million by October 2016 to pass the Amendment, and that it plans to launch the signature drive on April 9th if it has raised $900,000 by mid-March.
 Ohio Attorney General Mike DeWine rejected OMM’s first submission of the Amendment on March 11, 2016, citing several inconsistencies between the summary and the language of the Amendment. OMM submitted its second submission of the Amendment on March 15, 2016 and the Attorney General certified this version of the Amendment on March 25, 2016.
 We use “Issue 2” in the colloquial sense to refer to the new provisions added to Article II, Section 1e of the Ohio Constitution, which in pertinent part provides that “the power of the initiative shall not be used to pass an amendment to this constitution that would grant or create a monopoly, oligopoly, or cartel, specify or determine a tax rate, or confer a commercial interest, commercial right, or commercial license to any person, nonpublic entity, or group of persons or nonpublic entities, or any combination thereof, however organized, that is not then available to other similarly situated persons or nonpublic entities” (emphasis added).
 Article II, Section 1e(B)(2)(a) of the Ohio Constitution states that, if the ballot board determines the Amendment violates the language cited in footnote 4, then the ballot shall first ask voters the question: “Shall the petitioner, in violation of division (B)(1) of Section 1e of Article II of the Ohio Constitution, be authorized to initiate a constitutional amendment that grants or creates a monopoly, oligopoly, or cartel, specifies or determines a tax rate, or confers a commercial interest, commercial right, or commercial license that is not available to other similarly situated persons?” Then the voters will be asked the second question of whether the Amendment should be passed.
 For instance, if the legislature’s program creates a new agency or utilizes an existing agency other than the Department of Health for administering its program, it will likely result in two overlapping administrative bodies responsible for regulating parallel markets. Also, if certain items like possession limits, doctor–patient relationship qualifications, prohibition on homegrow, taxation, etc. are threaded throughout the program, they could expose significant portions of the law to being struck down by courts as violative of broader constitutional rights provided by the Amendment.