California

Another Lawsuit Highlights L.A.’s Licensing Challenges

avatar Hilary Corrigan / Sep 2, 2020

Three companies have sued the City of Los Angeles over the bungled roll-out of its cannabis license application process.

Often called the world’s largest cannabis market, the new lawsuit highlights L.A.’s struggle to create a regulated and equitable marijuana industry.

ARMLA One Inc., ARMLA Two Inc. and Gompers SocEq Inc. sued the city, its Department of Cannabis Regulation and its executive director Cat Packer in U.S. District Court in California’s Central District Monday. Last year, ARMLA One was one of 100 applicants greenlit for a retail license.

The coveted licenses were reserved for “social equity” businesses whose owners are deemed to have been disproportionately harmed by marijuana prohibition and are often people of color. The city’s process of awarding the licenses has been rife with lawsuits and bitter accusations of unfair play.

After ARMLA successfully cleared the process, the city’s cannabis regulator subsequently revoked the company’s selection, according to the complaint. The company alleges the move was retaliation for its complaints about the application process.

The complaint alleges the regulator “colluded with their preferred Applicants,” changed city code to help them and “targeted ARMLA One” to revoke the company’s selection. “Defendants viewed ARMLA One as a whistleblower” because the company “repeatedly raised” concerns about licensing procedures to the defendants and City Council, and warned of applications filed improperly early, the complaint states. During the process it was understood that filing an application seconds earlier than a competitor could make the difference. (Read the complaint here.)

The regulator revoked ARMLA’s selection over a nearby preschool that had not yet opened when ARMLA applied, according to the complaint, but did not revoke the selection of other applicants “who cheated in the race and were within 700 feet of sensitive uses, including a school that had been open for years.” Among other demands, the case seeks unspecified damages and a trial, plus injunctions requiring defendants to reinstate ARMLA’s selection for a license and to process the other two plaintiffs’ applications.

The plaintiffs’ attorney declined to comment on the lawsuit. L.A.’s regulator referred questions to the city attorney’s office. An email from that office said, “We will review the complaint and have no further comment at this time.”

Early start?

According to the complaint, the three plaintiff companies’ unnamed founder emailed executive director Packer and others at the city regulator in late August 2019, saying he had heard applicants connected to an unnamed former city official could upload application documents before the application race’s 10 a.m. start time on Sept. 3. A department response said document uploading would start at 10 a.m. on Sept. 3 and there was no way for applicants to pre-upload documents.

In late May 2020, a third-party audit found 226 applicants of more than 700 accessed the system early, with two submitting completed applications before the system even opened, the complaint states.

The audit found the regulator took “reasonable and appropriate” steps to prevent them from having an unfair advantage.  However, the complaint questions the impartiality of the auditor who “bent over backwards to avoid assigning blame to Defendants.”

In late August 2019, the plaintiffs’ founder discovered that a pre-school planned to open near ARMLA One’s proposed business premises. It had not received a license, but ARMLA disclosed the potential “sensitive use” in its application. 

On Sept. 3, about 762 applicants submitted applications. The complaint calls ARMLA One “one of the fastest non-cheating Applicants,” logging in at 10 a.m. and completing the application in just over a minute. On Sept. 10, ARMLA found out the preschool had received a state license and informed regulators, noting that a state website had shown the center as unlicensed when ARMLA applied. In October, the city announced ARMLA as one of the winners to proceed with licensing. 

ARMLA continued trying to contact regulators, to see if it could relocate the proposed business, the complaint says. In December, the regulator revoked ARMLA’s selection, although the complaint does not detail any given reasons. ARMLA says it repeatedly tried and failed to discuss the issue with officials.

‘Misinformation campaign, falsified timestamps’

The complaint alleges the regulator allowed their preferred applicants to begin the application process before the 10 a.m. start time on Sept. 3, then “embarked on a misinformation campaign to cover their misdeeds.” 

For instance, the company claims a Sept. 6 update on the department’s website said the department had launched the application process at 10 a.m. on Sept. 3 for verified social equity program applicants. And in a spreadsheet defendants published, they “falsified the timestamps of applicants” who logged into the system before 10 a.m. on Sept. 3, the complaint says.

“Despite Defendants’ misrepresentations, rumors began circulating that Defendants had allowed some Applicants to sign into” the application system earlier, the complaint says. It cites the nonprofit California Minority Alliance’s allegations that an applicant submitted an application at 9:51 a.m., that defendants assigned that application a false timestamp of 10:01 a.m., that defendants disabled security features meant to block bots and that defendants accepted applications from bots.

Later in October, “facing mounting public pressure,” the defendants “knowingly published another false Update on the Department’s website” to claim two applicants had accessed the system before the official launch, the complaint states. The defendants said they became aware of the cases on Sept. 3, the complaint says, noting their Sept. 6 website post.

Hearing allegations that applicants accessed the portal before the official start time, city leaders called for an independent auditor to review the process. By mid-December, “defendants had changed their story yet again” and admitted 14 applicants started their applications before the official start time, the complaint says.

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