Carlton L. Johnson, left, and Thomas W. Nardi, right, of Archer & Greiner.

Clients operating—or looking to become involved—in the cannabis space face significant challenges: Uncertain legal footing, thin profit margins, tight competition and a stigmatized product, to name but a few. One challenge, however, presents a significant business opportunity for those who are willing to champion the cause: Creating diversity in the cannabis industry.

For decades, black and brown communities have been disproportionately affected by the criminalization of cannabis. Studies have repeatedly shown that, while Americans of all races and ethnicities use illicit drugs at roughly the same rates, African Americans are three to four times more likely to be arrested and imprisoned for drug use as compared to their white counterparts. This imbalance had continued even in the face of criminal justice reform. Of the roughly 1,800 people arrested in Philadelphia since the "decriminalization" of marijuana in the city, 81% are African American, against a city population that is only 44% African American.

Unfortunately, as the cannabis legalization movement grows, participation in and ownership of the cannabis industry are stratified; those most impacted by the criminalization of cannabis are shockingly least likely to benefit from reform. A recent study found that 81% of cannabis business owners and founders nationally are white. And many legal cannabis programs create barriers to participation for those who have been convicted in the past, continuing the effects the disparate racial impact of the War on Drugs.

As just one of the most recent examples, the 2018 Farm Bill legalized the commercial production of industrial hemp, defined as the plant cannabis sativa L. or any part of it, with a THC content of not more than 0.3%. THC is the psychoactive component of cannabis. By definition, then, industrial hemp has no psychoactive effects. Yet the Farm Bill bars anyone with a state or federal drug conviction from working in the industry for 10 years after his conviction, see 7 U.S.C. Section 1639p. Similarly, Pennsylvania's Medical Marijuana Act bars those with past drug convictions from ever participating in the industry—even as volunteers for medical marijuana organizations, see 35 P.S. Section 10231.614.

For our clients, creating a diverse industry is not only a cause of social justice; it is a business imperative. Pennsylvania's Medical Marijuana Law created 50 dispensary permits and 25 grower/processor permits to be awarded across the state. Applications were scored out of 1,000 points. One hundred points—10% of the total application—were based on an applicant's diversity plan. That was more than any individual category scored, except for community impact. To maximize the diversity plan score, an applicant's score had to be more than a statement of values, but a full plan for diversity in ownership, management, workforce and even in contractual partners.

This means that promoting diversity is a must not only for direct license holders who "touch the plant," but also vendors in the ancillary market looking to do business with those license holders.

However, the statistics show that diversity is not a priority for many Pennsylvania medical marijuana organizations. The Department of Health awarded dispensary and grower/processor permits in two phases. In Phase I, the average diversity score of all applications for a dispensary permit was just 41.44 points out of 100. The average score for a winning application was not much better—just 49.62 points out of 100. The average scores for grower/processors in Phase I were similarly lackluster: 43.28 for all applicants, and 58.42 for winning applicants.

These scores represent the intersection of two problems. First, and more easily solvable, applicants simply did not prioritize criteria by that the commonwealth judged applications. Particularly in a robust competition for a limited amount of government permits, even a small difference in gradation on an application can be the difference between winning a permit and losing it. Second, the scores reflect the persistence of past discrimination. The laws being passed today are helping to entrench the well-connected at the expense of those who have suffered from the criminalization of a now (somewhat) legal product.

The Pennsylvania Department of Health mandated that permittees be operational within six months of being awarded a permit. The businesses most primed to take advantage of this requirement were those already established elsewhere. Indeed, in Phase II, the Department of Health awarded 23 permits to both dispensary and grower/processor applicants. More than half went to just three companies—all headquartered out of state, see Wood, Sam, "Big Marijuana Tightens Grip, Receives Most New Pa. Dispensary Permits," Philly.com (Dec. 18, 2018). Pennsylvanians are losing out on Pennsylvania's cannabis market.

Some states have decided to tackle this issue head on. Perhaps most boldly, Massachusetts dedicated $300,000 per year to train those people most disproportionately harmed by marijuana prohibition and enforcement to take jobs throughout this industry in what it calls its "social equity" program.

The social equity program targets two types of residents: those with past drug convictions and the spouses and children of those with convictions, and those who live in a community of disproportionate impact, meaning with an income below 400% of the federal poverty level. The state then contracts with outside firms who provide training in one of four tracks: ownership, management, entry level positions and transferable skills. Cities like Somerville and Cambridge are developing their own programs to complement the state.

In a city like Philadelphia, such a program would be transformative. The median household income in Philadelphia is just $39,770, and 25.3% of city residents live in poverty. In some of the neighborhoods of North and West Philadelphia, that drops to just $18,000 per household. On top of this, Philadelphia has the highest incarceration rate of the top 10 largest American cities.

In 2017, the size of the legal cannabis market was roughly $10 billion. By 2030, the industry is projected to reach $75 billion in sales, putting it on par with the American soda industry. The story of the next 10 to 12 years is going to be who shares in that $65 billion in growth.

From the perspective of social equity, legalizing an industry formerly relegated to the black market and ending a prohibition that always disproportionately impacted communities of color, will help eliminate one of the great racial inequalities in our society. And for clients looking to expand into a burgeoning market, it will help them stand out from their competitors. It is a win-win all around.

Carlton L. Johnson is a partner at Archer & Greiner in Philadelphia and a member of the firm's cannabis law practice group. He can be reached at 215-279-9696 or [email protected].

Thomas W. Nardi is an associate at the firm's Philadelphia office and a member the cannabis law practice group. He can be reached at 215-246-3107 or [email protected].