Executive Summary:[1]

Proposed legislation for New York State, if enacted, will create a process by which various corporate entities can apply to the state Department of Health for registration as marijuana growers and sellers. The law apparently will allow for-profit entities to grow marijuana and sell it to not-for-profit corporations (and certain other highly-regulated entities) that in turn can sell directly to patients who are registered with the Department of Health. This article summarizes the elements of the proposed law relevant to the supply side of the prospective medical marijuana market in New York.

[January 2014: hello to all you who found this page by searching for “marijuana” “license” “grow” “New York” or some variation thereof. As you can see, I use the term “cannabis” generally now so you found this first post on my blog only because I was still using the term “marijuana” when I wrote it. Go to the summer of 2013 posts on the latest version of the medical-use-only-bill and to January 2014 posts for analysis of the full legalization bill as well.]

History and context of the proposed New York medical marijuana law

Assembly Member Richard Gottfried (chairman of the Assembly Health Committee) and Senator Tom Duane (chairman of the Senate Health Committee) have sponsored legislation in their respective houses[2] that, if enacted, will permit cultivation, sale, purchase, and use of marijuana for medical purposes. Although Assembly Member Gottfried has sponsored some variation of this legislation every year over the past twelve years, this year is the first one in which an identical bill is pending in the Senate as well.

While the chaotic growth of the medical marijuana dispensary business in California has generated news coverage and extensive litigation, the regulatory scheme which the Gottfried/Duane bill proposes differs significantly from the California approach. The proposed New York medical marijuana law is part of a second generation of medical marijuana bills – similar to the type enacted in New Jersey,[3] New Mexico,[4] and Rhode Island.[5] In this type of regulatory scheme, the state government licenses both the patients and their “designated caregivers” (the demand side) and the cultivators and dispensers of marijuana (the supply side). With one minor exception,[6] the proposed law in New York will permit only corporate entities to be registered as suppliers. In fact, the proposed law does not permit individuals to cultivate marijuana, even for their own use. Unlike the system in Rhode Island,[7] the law does not place any arbitrary limitation on the number of suppliers which the state government can license.[8]

Sidestepping federal prohibition of marijuana through a doctor’s “certification”

Fifteen states and the District of Columbia have approved bills or enacted legislation permitting the medical use of marijuana[9] notwithstanding the fact that federal law does not permit any use of marijuana, whether for “medical” or “non-medical” purposes, other than in research.[10] Under the Controlled Substances Act (“CSA”), as a psychoactive substance classified as “Schedule I,” marijuana may not even be prescribed by a physician.[11] The various state medical marijuana laws attempt to avoid this federal prohibition in the following way: a physician does not “prescribe” marijuana for a patient, but rather certifies that in his professional medical opinion the patient would benefit from the use of marijuana. The patient can then use the physician’s certification as a defense against criminal prosecution for possession and use of marijuana.

The first generation laws, beginning with California, did not provide explicitly for the establishment of the supply-side, i.e. the legal manufacture and sale of marijuana to patients. This lack of definition has led to some of the volatility seen in the California medical marijuana market, in particular police raids on medical marijuana growers and dispensaries and civil litigation in which counties and municipalities try to limit access to or ban marijuana dispensaries altogether.[12]

Cultivating and selling marijuana under New York law

The second generation laws attempt to avoid this disorderly situation by centralizing the process within the state government and requiring pre-registration of both patients and suppliers. Following the lead of states such as New Jersey, New Mexico and Rhode Island, the Gottfried/Duane bill, creates a new Title V-A in Article 33 of the N.Y. Public Health Law [13] which will allow (a) patients to apply to the Department of Health for registration and issuance of a “registry identification card”[14] based on certification by a “practitioner”[15] that, among other things discussed more fully at the end of this article, it is the practitioner’s professional opinion that the patient would benefit from the use of marijuana and (b) six types of entities to apply to the Department of Health to become “registered organizations” with the right to cultivate and sell marijuana to duly-registered patients. In his or her application, a patient may identify another individual whom the patient wishes to act as a “designated caregiver” and who may obtain marijuana for that patient.[16] For simplicity this article will use the terms “supplier” and “consumer” to refer to “registered organization” and “patient and/or designated caregiver,” respectively.

The NY law will permit the following six types of entities to be a supplier: (a) a pharmacy, (b) a hospital, (c) the state Department of Health (the “DOH”), (d) a local department of health, (e) a not-for-profit corporation organized for the purpose of supplying marijuana to consumers, and (f) a person or entity with appropriate expertise in acquiring, cultivating, and distributing marijuana.[17] The proposed law refers to this last type of supplier as a “registered producer.” Under the plain language of the proposed law, two primary characteristics of a registered producer are that (i) it can be any person or entity, which implies a for-profit entity and (ii) it can only distribute marijuana to another supplier.[18] In other words, an individual or for-profit entity can act as a wholesaler and cannot distribute directly to consumers–an arrangement reminiscent of alcohol regulation.

It is an open question whether any pharmacy or hospital will actually attempt to function as a supplier until there is a change in federal law. Pharmacies must register with the federal Drug Enforcement Administration in order to distribute controlled substances[19] and therefore, presumably, are at risk of license suspension if they attempt to cultivate, acquire, possess, or distribute marijuana. Likewise, to the extent a hospital relies on federal funding or reimbursement, its attempt to act as a supplier presumably could jeopardize its function by putting it at risk of sanctions from the federal government. Whether DOH or local health departments will attempt to act as suppliers is a political question the resolution of which may leave the supply side of the market wholly to private sector actors. The practical analysis then is to determine who will create and operate (a) the not-for-profit corporations that may distribute to consumers and (b) the persons or (potentially for-profit) entities that can only distribute to other suppliers, which shall be distinguished from other suppliers as a “wholesaler” consistent with the market lexicon being used in this article.

A supplier may legally acquire, cultivate, sell, transport, and distribute marijuana according to the terms of the proposed law.[20] The law provides that any supplier (other than a wholesaler) may lawfully, in good faith, sell, deliver or distribute marijuana to a consumer upon presentation of a registry identification card issued by DOH.[21] The law limits possession of marijuana by a consumer to no more than two and a half ounces of at any one time[22] and accordingly limits a supplier to distributing a maximum of two and a half ounces to any consumer at one time.[23] When a supplier sells, delivers or distributes marijuana to a consumer, it must also provide (a) a receipt stating the name, address, and registry identification number of the supplier, the registry identification number of the consumer, and the amount of marijuana sold[24] and (b) a safety insert to be developed by DOH which shall state (i) the methods for administering marijuana, (ii) any potential dangers resulting from the use of marijuana, and (iii) recognizable signs of and available treatments for problematic usage of marijuana.[25] The supplier must retain a copy of the registry identification card and the receipt for one year.[26]

Applying for registration as a marijuana supplier[27]

The proposed law authorizes DOH to promulgate regulations that will govern implementation of the law. As relevant here, the law delegates to DOH the exercise of discretion over the initial registration of suppliers and registration renewals.

The law provides for the following application process. An applicant must submit a description of the activities it intends to conduct, along with any information DOH may reasonably require, and demonstrate that: (a) the applicant and its managing officers are of good moral character,[28] (b) the applicant possesses or has the right to use sufficient land, buildings, and equipment to carry on the activities which it intends to conduct,[29] (c) the applicant is able to maintain effective control against “diversion” of marijuana,[30] (d) the applicant can comply with all applicable state laws and regulations,[31]and (e) the applicant is one of the six types of entities that may be a supplier.[32]

The application must also include the name, residence address, and title of each of the officers and directors of the applicant or the name and residence address of each person or entity that is a member of the applicant.[33] This language strongly suggests that an applicant seeking to be registered as a wholesaler may be a business corporation or a limited liability company; whether the applicant may be a partnership, limited partnership or other entity remains to be seen and will be a matter of interpreting the law. Each person or a representative of each corporate entity must submit an affidavit with the application stating (a) any position of management or ownership of ten percent or more interest in any business that has been engaged in manufacturing or distributing drugs in the past ten years, (b) whether any such person or business has been convicted, fined, censured, or had a registration suspended or revoked relating to the manufacture, distribution, sale, or possession of drugs, and (c) any other information which DOH may reasonably require.[34] In addition to these initial disclosures, a supplier has an ongoing obligation to report to DOH any change in the facts stated in the application or any new fact that would have been required to be disclosed in the application.[35]

DOH is also authorized to set the application fee.[36]

The proposed law states that DOH shall register an applicant (or, as discussed below, approve an amendment to a registration) if it is satisfied that (a) the applicant will be able to prevent diversion, (b) the applicant will be able to comply with all relevant state laws, (c) the applicant and its officers are ready, willing and able to carry on the cultivating or distributing activity described in the application, (d) the applicant has the right to use sufficient land, buildings, and equipment to carry on the activities which it intends to conduct, (e) it is in the public interest that the registration be granted, and (f) the applicant and its officers are of good moral character.[37]

If DOH is not satisfied that the application should be granted, it must notify the applicant of the factors that require further evidence.[38] The applicant may submit additional material in support of its application, request a hearing, or both within thirty days from receiving a notice from DOH.[39]

DOH may deny an application for registration on the basis of failure to demonstrate any one of the six factors listed above. Of these factors, the “public interest” seems to have the farthest-reaching potential for subjective determination. The other five factors relate directly to the applicant itself; in contrast, the public interest factor seems to open the door to consideration of any and all conditions unrelated to the applicant, for example, the number of existing suppliers in a given area, a fact for which other second generation medical marijuana laws explicitly mandate consideration. A viable medical marijuana regime in New York will require interpretation and application of the public interest factor in a manner that does not unreasonably restrict the supply of medical marijuana. It is worth noting that the introductory section of the proposed law recites a legislative finding that “thousands of New Yorkers have serious medical conditions that can be improved by the medically-approved use of marijuana” and that “the law should not stand between them and treatment necessary for life and health”; this introductory section further states the legislative intent that the law “be implemented consistently with these findings and principles, through a reasonable and workable system with appropriate oversight, evaluation, and continuing research.”[40] These statements of legislative intent provide a basis for interpreting “public interest” in favor of a supply limited only by the volume of legitimate demand determined by the market itself, and accordingly registering an applicant unless evaluation of the other five factors demonstrates defects in the applicant.

A registration is effective only for the particular applicant and it shall specify the applicant’s name and address and those activities of a supplier that are permitted under the registration.[41] This provision apparently seeks to prevent the transfer of a registration from one entity to another without DOH’s approval. A supplier’s registration is valid for two years from the date of issue.[42]

The law also permits a supplier to amend its registration in order (a) to relocate from the address specified in its application or (b) to add or delete activities that it may conduct.[43] An amendment requires a separate application to DOH.[44]

Renewal of a registration

As stated above, an initial registration as a supplier is valid for two years from the date on which the registration is granted. The proposed law provides that a supplier may apply for renewal of a registration beginning six months before the expiration date and not less than four months prior to the expiration date.[45]

DOH is authorized to determine what information must be included in a renewal application, but shall require inclusion of information concerning: (a) any significant change in the circumstances or factors required for the supplier’s initial application for registration and (b) every known charge or investigation by any government agency concerning diversion of marijuana or compliance with state laws governing other controlled substances during the prior period of registration.[46] If DOH determines that an application for renewal of a registration should be denied, the applicant has the opportunity to submit additional information, demand a hearing or both.[47] DOH must grant an application to renew unless it finds that the supplier is unlikely to prevent diversion of marijuana or is unlikely to comply with state laws governing the activities permitted under its existing registration.[48]

Reports by a supplier

The proposed law requires each supplier to report all sales of marijuana.[49] DOH is permitted to develop the format of the report and to mandate the frequency of reporting. In the first year after the law takes effect, DOH can require reports only as often as every three months; after the first year DOH can require reports no more often than every six months. Each report must state each sale of marijuana, the date of sale, the quantity of marijuana sold, and the name, address, and registry identification number of the consumer.[50]

Reports by the Department of Health; contracts with the private sector

The proposed law also requires that DOH report to the Governor and legislature one year after the law takes effect and every two years thereafter on the functioning of the medical marijuana system and make appropriate recommendations.[51] DOH may contract with individuals, not-for-profit corporations or other organizations to evaluate the implementation and effectiveness of the law.[52]

Note on the scope of conditions for which marijuana will be available

The proposed law contains a broad scope of conditions for which marijuana will be available. As noted above, when a person applies to be registered by DOH as a medical marijuana patient, the patient does so on the basis of a practitioner’s certification that it is the practitioner’s professional opinion that the patient would benefit from the use of marijuana.[53] Specifically, the practitioner also certifies that the patient has “a serious medical condition” and that the patient is under the practitioner’s care for that serious medical condition.[54] The law defines “serious medical condition” as “a severe debilitating or life-threatening condition, or a condition associated with or a complication of such a condition or its treatment (including but not limited to the inability to tolerate food, nausea, vomiting, dysphoria or pain),”a rather extensive definition.[55] Unlike the laws of other states,[56] the law proposed for New York does not limit the conditions for which marijuana will be available; instead, it grants maximum discretion to a physician or other health care practitioner to facilitate a patient’s access to marijuana for therapeutic purposes.

Penalties for misconduct

The proposed law does not expressly provide any penalties for violation of the law, whether diversion of marijuana or other misconduct. The law states that a person or entity shall not be subject to criminal or civil liability or professional discipline for acting reasonably and in good faith.[57] This statement supports an argument that the law intends to leave untouched existing criminal penalties for marijuana cultivation and sale and will rely on the existing structure for professional medical discipline as the mechanism for ensuring that health care providers do not act as the marijuana equivalent of “pill mills.” In other words, the proposed law can be understood as a medical exception to the existing marijuana prohibition and a defense to prosecution for marijuana-related offenses.

Conclusion

As drafted, the proposed law will allow not-for-profit corporations to apply to DOH for authorization to cultivate and sell marijuana to consumers. It will also authorize individuals and both not-for-profit or for-profit corporate entities to cultivate marijuana and sell it to the entities that in turn sell marijuana directly to consumers. It will grant to physicians and certain other health care providers maximum authority to determine whether a given patient would benefit from the use of marijuana. It will grant DOH exclusive control over the process of legalizing access to marijuana by patients based on a practitioner’s certification and, likewise, over the licensing of entities that can supply marijuana to the market. The law does not propose to permit any use of marijuana for non-medical purposes, although it is arguable that the successful operation of the supply side of the medical marijuana market would be the prototype for a regulated market of marijuana for general purposes.

In the event that the law is enacted, attorneys representing suppliers can reasonably expect to be called upon to address the nature of the regulations which DOH will enact, the narrowness with which DOH will administer the statute, the degree to which law enforcement will defer to the discretion of the medical profession and DOH, and, if the California experience is instructive, attempts by localities and private citizens to restrict the operation of suppliers through administrative action or civil litigation, such as public nuisance laws.

[1] The author acknowledges the assistance of Douglas Greene, Janet Mitrany, Buford Terrell, Zara Watkins, Esq., and Neil Wiesner, Esq. in preparing this article.
[2] A. 9016, 2010 Leg., Reg. Sess. (N.Y. 2009) and S. 4041-B, 2010 Leg., Reg. Sess. (N.Y. 2009).
[3] The New Jersey Compassionate Use Medical Marijuana Act, N. J. Rev. Stat. § 24:6I-1 to 16.
[4] Lynn and Erin Compassionate Use Act, N.M. Stat. Ann. § 26-2B-1 to 7 (2007).
[5] The Edward O. Hawkins and Thomas C. Slater Medical Marijuana Act, R.I. Gen. Laws §§ 21-28.6-1 to 12 (2009).
[6] An individual can apply to be a “registered producer,” a form of supplier that can sell marijuana only to other suppliers, not directly to an end user or the user’s caregiver.
[7] R.I. Gen. Laws § 21-28.6-12(a)(8) (limiting to three the number of registered dispensaries, designated as “compassion centers”).
[8] In comparison, the New Jersey law provides that the state licensing agency, the Department of Health and Senior Services, shall ensure a sufficient availability of suppliers “pursuant to need,” and that there shall be a minimum of two suppliers in each of the north, center, and south of the state. However, the statute does not require that the State determine whether the number of suppliers is adequate to meet the needs of patients until two years after the effective date of the statute. N. J. Rev. Stat. § 24.6I-14(c).
[9] Alaska Stat. §§ 17.37.010 – 17.37.080 (LexisNexis 2010); California Compassionate Use Act of 1996, Cal. Health & Saf. Code, § 11362.5 (LexisNexis 2010) (codifying voter initiative Prop. 215); Cal. Health & Saf. Code, §§ 11362.7 – 11362.83 (LexisNexis 2009-2010) (codifying SB 420); Colo. Const. Art. XVIII, § 14 (LexisNexis 2009); Colo. Rev. Stat. § 18-18-406.3 (LexisNexis 2009) (interpreting and applying the provisions of the constitutional amendment); Colo. Rev. Stat. § 25-1.5-106 (LexisNexis 2009) (codifying the powers and duties of the Colorado Department of Public Health); Haw. Rev. Stat. §§ 329-121 – 329-128 (LexisNexis 2010); Me. Rev. Stat. Ann. tit. 22, § 2383-B (LexisNexis 2009); Maryland Darrell Putman Compassionate Use Act, Md. Crim. Law Code Ann. § 5-601(c)(3)(ii) (LexisNexis 2010); Michigan Medical Marihuana Act, Mich. Comp. Law Serv. §§ 333.26421 – 333.26430 (LexisNexis 2010); Medical Marijuana Act, Mont. Code Anno. §§ 50-46-101 – 50-46-210 (LexisNexis 2010); Nev. Rev. Stat. Ann. §§ 453A.010 – 453A.810 (LexisNexis 2009); New Jersey Compassionate Use Medical Marijuana Act, N. J. Stat. § 24:6I-1 – 16 (effective July 1, 2010) (LexisNexis 2010); Lynn and Erin Compassionate Use Act, N.M. Stat. Ann. § 26-2B-1 – 7 (LexisNexis 2009); Oregon Medical Marijuana Act, Or. Rev. Stat. §§ 475.300 – 475.375 (LexisNexis 2009); The Edward O. Hawkins and Thomas C. Slater Medical Marijuana Act, R.I. Gen. Laws § 21-28.6-1 – 12 (LexisNexis 2010); Vt. Stat. Ann. tit. 18, §§ 4471- 4474d (LexisNexis 2010); Rev. Code Wash. §§ 69.51A.005 – 69.51A.902 (LexisNexis 2010). On April 20, 2010, the District of Columbia Council voted to approve the “Legalization of Marijuana for Medical Treatment Initiative Amendment Act of 2010.” Legislative Information Management System. (Accessed May 24, 2010, at http://www.dccouncil.washington.dc.us/lims/searchbylegislation.aspx)
[10] See Controlled Substances Act, 84 Stat. 1242, 21 U.S.C. § 801 et. seq. (1970); Gonzales v. Raich, 545 U.S. 1, 14 (2005) (“[b]y classifying marijuana as a Schedule I drug, as opposed to listing it on a lower schedule, the manufacture, distribution, or possession of marijuana became a criminal offense, with the sole exception being use of the drug as part of a Food and Drug Administration pre-approved research study”).
[11] 21 U.S.C. § 812(c) (classifying marijuana as a Schedule I drug); 21 U.S.C. § 829 (providing for prescription of substances in Schedules II through V, and omitting any such prescription of substances in Schedule I).
[12] See, e.g. City of Claremont v. Kruse, 177 Cal. App. 4th 1153 (Cal. Ct. App. 2d 2009) (affirming preliminary injunction against operation of medical marijuana dispensary on the grounds that operation of dispensary in violation of local zoning ordinance was nuisance per se notwithstanding state medical marijuana law).
[13] This article will refer to the relevant sections of the N.Y. law as “Section ____.”
[14] The State of California also provides for registration of patients and issuance of cards identifying the holders as medical marijuana patients but registry is voluntary. See Cal. Health & Safety Code § 11362.71. Whereas the proposed New York law keeps all registration functions with the state Department of Health, the California law assigns to counties the task of processing applications for registration and issuing identification cards. See id. at subparagraph (b); see also County of San Diego v. San Diego NORML, 165 Cal. App. 4th 798 (Cal. Ct. App. 4th 2008)(affirming judgment in favor of state in action by counties claiming that the voluntary registration program violates the United States Constitution and therefore counties were not obligated to participate).
[15] Defined in N. Y. Public Health Law 3302(29) as “a physician, dentist, podiatrist, veterinarian, scientific investigator, or other person licensed, or otherwise permitted to dispense, administer or conduct research with respect to a controlled substance in the course of a licensed professional practice or research licensed pursuant to this article.”
[16] Section 3363.2(c).
[17] Section 3364.1(a)-(f).
[18] Section 3364.1(f).
[19] 21 U.S.C. § 823(b), 21 C.F.R. § 1301.3(d).
[20] Section 3364.2.
[21] Section 3364.3.
[22] Section 3362.1.
[23] Section 3364.4.
[24] Section 3364.3.
[25] Section 3364.5.
[26] Section 3364.3.
[27] The application process for a prospective supplier discussed here corresponds generally to the process set forth in N.Y. Public Health Law § 3312-13, by which prospective manufacturers and distributors of other controlled substances apply to DOH for registration.
[28] Section 3365.1.A(I).
[29] Section 3365.1.A(II).
[30] Section 3365.1(A)(III). Diversion is defined in N.Y. Public Health 3302(12) as “the manufacture, possession, delivery, or use of a controlled substance by a person or in a manner not specifically authorized by law.”
[31] Section 3365.1(A)(IV). Unlike N.Y. Public Health Law § 3312.1(d), this section does not require a showing of the ability to comply with federal laws and regulations, presumably due to the complete federal prohibition of all uses of marijuana.
[32] Section 3365.1.B.
[33] Section 3365.1(C).
[34] Id.
[35] Section 3365.1(D).
[36] Section 3365.2(C).
[37] Section 3365.2(A)(I)-(VI).
[38] Section 3365.2(B).
[39] Id.
[40] A. 9016, S. 4041, supra FN 2, at Section 1.
[41] Section 3365.2(D).
[42] Section 3365.3.
[43] Section 3365.2(E).
[44] Id.
[45] Section 3365.4(A).
[46] Section 3365.4(B).
[47] Section 3365.4(E).
[48] Section 3365.5
[49] Section 3366.
[50] Id.
[51] Section 3367.3.
[52] Section 3367.1.
[53] Section 3361.1.
[54] Section Id.
[55] Section 3360(6).
[56] The New Jersey medical marijuana law permits the use of marijuana for treatment of a “debilitating medical condition,” which it defines as eleven enumerated conditions and such other medical conditions as the state may approve by regulation, N. J. Stat. § 24:6I-3. These eleven conditions are subject to additional limitations; for example, “debilitating medical condition” includes cancer only when the cancer or its treatment results in severe or chronic pain, severe nausea or vomiting, cachexia, or wasting syndrome.
[57] Section 3368.3.