Massachusetts Supreme Judicial Court Upholds Current Host Community Agreement (HCA) Law, Rules Against Prospective Salem Dispensary Mederi in Landmark Case With Major Implications.

In a major decision with wide ranging implications, current Host Community Agreement (HCA) law has been upheld today by the highest court in Massachusetts. In rejecting the claims of a prospective adult use dispensary in Salem, called Mederi, the Supreme Judicial Court (SJC) noted its concern with how current HCA law is being enforced -- in particular the impact on social equity companies -- but, in the end, ruled in favor of the city (who had sought to dismiss the lawsuit on the grounds that applicants for an HCA were not entitled to local approval, even if those companies were otherwise qualified).

Host Community Agreements, or HCAs, are contracts that companies must sign before beginning the process of obtaining a state cannabis license - wherein the operator may agree to give up to 3% of their yearly revenue to a their local city or town in the form of a "impact fee". That process, however, has long been a source of consternation for applicants seeking to open businesses in the flourishing industry, who feel there is no check and balance currently in existence to prevent abuses by those cities and towns when collecting those HCA "fees" or when deciding to reject an otherwise qualified applicant.

In what amounted to an interesting subtextual comment, however, the Court nonetheless observed that existing Cannabis Control Commision (CCC) regulations related to HCA's have created a situation wherein the Agency may well be functionally unable to meet its equity mandate per state law. As the Justices explained;

"The regulations call for economic empowerment priority applicants [and Social Equity applicants] to receive "[p]riority application review" by the commission. 935 Code Mass. Regs. § 500.102(2)(a). However, because municipalities, as the de facto gatekeepers to such priority application review, are not required to consider whether any entity seeking to enter into an HCA is an economic empowerment priority applicant [or a Social Equity applicant], such applicants may receive no commission review at all." (Ruling page 21-22. My additions in brackets)

The SJC also noted that, while corruption within the HCA process is a major concern, Mederi did not have grounds upon which to ask for a ruling on that issue as the company had yet to actually be charged or pay any HCA fees.

Today's ruling followed oral arguments in the case before the SJC in February of this year, where a number of questions were asked which seemed to indicate the Justices were skeptical of both Salem's position that it could summarily reject qualified applications AND the CCC's position in particular that the agency did not have the authority to review the content of HCA's.

Former Cannabis Control Commissioner and CEO of the think tank Parabola Center, Shaleen Title, said today's ruling underscored the long discussed need for reform of the local approval process in order for the state to achieve its equity goals. "The Court explicitly acknowledged that the improper charging of HCA fees are a concern," she said, "even though Mederi didn't have standing to challenge it in this case because they hadn't received an HCA and therefore hadn't paid HCA fees. It also noted that the commission's current regulations with respect to local approval may fall short of accomplishing the state's equity goals."

Last month, State Attorney General Maura Healey also weighed in on the issue, telling listeners on WGBH that, "I have been on record [about] giving the Cannabis Control Commission authority to review Host Community Agreements...and my message to cities and towns is be reasonable, don't be exploitative, and follow the law."

Just a few months ago, in May of this year, members of the Joint Cannabis Policy heard nearly four hours of public testimony on a slate of bills seeking to reform the HCA process, with one bill from Senator Patrica Jehlen (S.72) coming quickly to the fore as a comprehensive proposal; that bill includes changes such as mandating local cities and towns take equity status into consideration when issuing HCA agreements and a provision requiring that all fees collected pursuant to those contracts be specifically documented and made available for inspection.

In the course of the case, Mediri argued that Salem's rejection of an otherwise qualified application from the company undermined the authority of the state's Cannabis Control Commission (CCC) to issue licenses in the nascent adult use industry. That argument ended up being unpersuasive to the court, as explained in today's ruling;

"Nothing in G. L. c. 94G, § 3, imposes a duty on a city or town to enter into an HCA with a prospective recreational marijuana establishment simply because that establishment is able to fulfill the municipality's HCA requirements. Indeed, G. L. c. 94G, § 3 (d), the provision governing HCAs, merely provides that a prospective marijuana establishment must enter into an HCA with a host community before it can operate. That provision contemplates a negotiation between the host community and the applicant, stating that the HCA must include "all stipulations of responsibilities between the host community and the marijuana establishment."

The CCC, for its part, told me through a Spokesperson last month that;

"Two years ago, and again as part of the recent Joint Committee on Cannabis Policy hearing, the Cannabis Control Commission (Commission) submitted a several-hundred page report to the Legislature seeking clarification and authority to regulate Host Community Agreements (HCAs). Since then, a Superior Court judge has agreed the Commission is consistent in its position that it has no role under Chapter 94G in reviewing the contents of HCAs, and the statute gives the agency no further role beyond the certification to the contents of the HCA, which the Commission currently does through its licensing review process. While the Commission awaits further guidance from the Legislature, last year it implemented a new practice in which all licensees applying for renewal must submit municipal data regarding the funds their city or town put towards community impact. As part of the agency’s commitment to transparency, the Commission continues to report publicly on the data it receives as part of its monthly public meetings."

Today's ruling, however, will do little to quell long simmering concerns among advocates and industry regulators who feel that confusion surrounding HCA law can and will lead to situations such as that which occurred in Fall River, wherein then-Mayor Jasiel Correia was implicated in - and ultimately convicted of - extorting cannabis companies seeking to obtain local approval.

That "municipal rent seeking" is also not limited only to Fall River, as applicants from around the Commonwealth (often times smaller local companies who were promised an opportunity to enter the industry after years of ongoing systemic racism and drug war enforcement) have told me on multiple occasions that a laundry list of cities and towns are ignoring even the few rules that do exist within the HCA process.

In fact, during Correia's trial there was testimony on the record from multiple prosecution witnesses that the "going rate" for obtaining extralegal local approval in some towns is a cool $250,000.

To this, the Court notes a case involving a company that was actually charged an illegal HCA fee would create the jurisdictional standing needed for the Justices to provide a ruling;

"Further, although we conclude that Mederi does not have standing to contest the payments the city requires of its HCA partners in excess of the community impact fee, see G. L. c. 94G, § 3 (d), we acknowledge the concern raised. The applicable statutory provisions and regulations are silent with respect to whether municipalities may mandate such payments; viable arguments may be made on both sides of the issue. 19 Regardless, the practice of requiring HCA partners to make payments in addition to the community impact fee has the potential to create an unfair advantage for municipalities and better-funded applicants. Importantly, it also may create a barrier to entry for prospective economic empowerment priority applicants." (Ruling page 22-23)

One such case has indeed been making its way through the lower courts in Massachusetts; STEM Haverhill, a social equity applicant, is currently suing the city of Haverhill over that very issue. In particular, allege the owners of STEM, the city has failed to document the alleged "negative impact" being caused by the company and thus the "fee" being assessed is prima facie invalid.

Time will tell if the STEM Haverhill case will become the next HCA issue ripe for review by the SJC, but in light of the hints provided by today's ruling it seems an answer will be forthcoming sooner rather than later.

In closing, the SJC also noted something that perhaps all sides of the HCA debate feel is a fundamental axiom; "[i]mplementing the framework governing the new recreational marijuana industry has revealed gaps that the Legislature and commission likely did not anticipate. Closing those gaps would provide much-needed clarity."