Kevin J. McKeon of Hawke McKeon & Sniscak.

Litigation has improved Pennsylvania's medical marijuana research program. The program, Chapter 20 of the Medical Marijuana Act, pairs medical school/teaching hospitals with businesses that grow and dispense medical marijuana. Originally enacted as part of the act in April 2016, Chapter 20 allowed for licensing of teaching hospitals associated with medical schools to do research (dubbed Academic Clinical Research Centers or ACRCs) and offered eight permits to businesses that would grow and dispense medical marijuana (clinical registrants or CRs) for clinical trial purposes. Entities approved as CRs would have a grower/processor permit and a “super” dispensary permit providing six dispensary locations rather than the three allowed for commercial dispensary permittees. But while Chapter 20 of the act made clear its primary focus was on research, it left important questions unanswered. Could CRs compete with other medical marijuana permittees for commercial sales? Did a CR applicant need to have a contract with an ACRC before it could apply for CR status? Did the contract need to be exclusive? Did a CR applicant need to have grower/processor and dispensary permits before it could apply for CR status? Two lawsuits, which resulted in one statutory amendment and two additional sets of administrative regulations, appear to have finally produced definitive answers to the questions, a more open CR selection process and CR day-to-day operations that will place research first.

The story begins with the Department of Health's (DOH) staged rollout of Pennsylvania's medical marijuana program. DOH prioritized the establishment of administrative processes for selecting and permitting the statutory maximum of 25 grower/processors and 50 dispensaries, enrolling patients, and certifying physicians and laboratories, with the goal of enabling patients to obtain Pennsylvania-grown medical marijuana from Pennsylvania dispensaries as quickly as possible. The rollout was remarkably successful. DOH was able to receive applications for grower/processor and dispensary permits less than a year after the act became law, issue permits by June 2017, and oversee the first Pennsylvania dispensary sales of Pennsylvania-grown and processed medical marijuana by February 2018. Competition for grower/processor and dispensary permits was intense: only 1 in 10 of the applicants for the 13 grower/processor and 27 dispensary permits issued in the first phase got a permit.

Meanwhile, DOH implementation of the Chapter 20 research program got a shakier start. By the time DOH issued implementing regulations in March 2018 and set a timeline for submission of CR applications, each ACRC (teaching hospital/medical school) already had pre-selected an entity to be its CR. DOH's initial Chapter 20 regulations essentially deferred to the choices the ACRCs and their aspiring CR partners had already made. DOH's initial regulations permitted only a single CR applicant for each of the eight ACRCs, because it required the CR applicant to have an exclusive contract with an ACRC as a condition of application. However, DOH did not require that CR applicants already possess the needed grower/processor and dispensary permits. This meant that each CR applicant would be the only applicant in its class—there were eight ACRCs, and a single CR applicant for each. And DOH's regulations allowed CRs to compete commercially with existing permittees. Additionally, DOH's initial regulations allowed for CRs to commit to only a minimal level of research. The upshot was that an entity that had either sat on the sidelines during the intensely competitive commercial permit application process, or that had tried and failed to get a commercial permit, would essentially be assured of getting a “super permit” on a noncompetitive basis simply because it had been able to obtain an exclusive contract with an ACRC, and then to operate as a CR more as a commercial competitor than a research partner.

Concerned that DOH's initial regulations implementing Chapter 20 failed to honor the act's dedication of CRs to research, and that the ACRC contract prerequisite abdicated and improperly delegated DOH's duty to select the best candidates for CR status to ACRCs, a group of existing permit winners sued to permanently enjoin DOH's initial Chapter 20 regulations and asked that the regulations be preliminarily enjoined to prevent the process from moving forward pending resolution of the lawsuit. After taking testimony and reviewing legal arguments, the Commonwealth Court preliminarily enjoined DOH's initial regulations on May 22, 2018, see AES Compassionate Care v. Levine, No. 233 M.D. 233 (Pa. Cmwlth. 2018) (McCullough, J.) (unreported). The court found a clear right to relief in that the initial Chapter 20 regulations unlawfully delegated to ACRCs the vetting and selection of the most qualified entities to be CRs and required “only a minimal commitment to research to obtain and retain a permit,” thwarting the legislature's “intent to implement a robust research program” for medical marijuana. The court also concluded that whereas Chapter 20 of the act prohibited CRs from engaging in “commercial distribution” of medical marijuana in competition with existing permit holders, DOH's initial Chapter 20 regulations permitted CRs to sell medical marijuana in competition with existing commercial permittees.

The General Assembly reacted swiftly, enacting Act 43 of 2018 less than a month later to amend Chapter 20 of the act to provide that CRs are not prohibited from engaging in “commercial distribution” of medical marijuana in competition with existing commercial permit holders—thereby removing one of the reasons for Commonwealth Court's preliminary injunction. DOH followed suit, rescinding its initial Chapter 20 regulations in July and issuing revised Chapter 20 regulations in August 2018, that were intended to implement Chapter 20 as amended. DOH's revised regulations made an important change requiring a CR's greater dedication to research than had previously been required, mandating that a CR may not sell commercially from a dispensary unless it proves to DOH's satisfaction that it is or will shortly be engaging in research involving that dispensary. However, DOH's revised Chapter 20 regulations made no change to rectify the delegation problem that troubled Commonwealth Court.

Existing permit holders sued again, and again sought a preliminary injunction from Commonwealth Court, arguing that DOH's revised Chapter 20 regulations continued to require that a CR applicant include with its application, as a precondition to being considered for CR status, an executed contract with the ACRC with which it had agreed to partner. This, the plaintiffs alleged, again improperly allowed each ACRC to select the single entity that could lawfully apply to be that ACRC's CR, and thus effectively preordained the issuance of grower/processor and dispensary permits to the CR applicant chosen by the ACRC, leaving DOH with the fait accompli of approving the ACRC's choice and issuing a grower/processor permit and a dispensary permit to the single prospective CR privately pre-selected by the ACRC, or denying the CR's application.

The second lawsuit was filed Nov. 28, 2018. Less than a week later, DOH either denied or rejected the eight CR applications that had been filed pursuant to its revised regulations, creating the possibility for a second round of CR applications. Two weeks after that, DOH significantly amended the regulations governing its CR application process. Under the regulations as revised for the second time, the CR selection process has finally opened up. An ACRC can provisionally contract with multiple potential CRs; in selecting the eight CRs from what DOH hoped would be a “broadened … field of applicants,” DOH will give preference to entities that already possess permits. DOH also reset the CR application deadline for mid-April, with an eye to providing more would-be CR applicants time to establish a relationship with an ACRC. The plaintiffs responded by withdrawing their second lawsuit.

The CR application evaluation and selection process is now underway, with applications filed by April 11. As of this writing, DOH has yet to release the number of CR applications received under the revised process. But having encouraged ACRCs to provisionally contract with multiple potential CR partners and having made it clear that CR applicants that already have permits and are operational will be given preference in the CR-selection process, DOH has made significant strides in creating an environment in which the most capable grower/processors and dispensaries will contract with ACRCs and achieve CR status.

The moral of the story? Often discounted as sore loser whining, focused litigation by industry groups involving legislative and regulatory ground rules is more often a continuation of administrative rulemaking by other means. Resort to the courts should rarely be the first option, but litigation is an essential element of the government lawyer's toolbox, and can play a substantial and beneficial role in the development of regulatory policy, as it did with Chapter 20.

Kevin J. McKeon is a partner with Hawke McKeon & Sniscak LLP in Harrisburg. An appellate advocate and government law practitioner, he was part of the plaintiffs team in the referenced challenges to the Chapter 20 regulations. He is a frequent lecturer and panel moderator on appellate issues and on topics in administrative law. Contact him at [email protected].