Caps, Lotteries and Scoring: Three Issues in Licensing

licensing issues

Rob Patridge, chairman of the Oregon Liquor Control Commission, recently indicated that Oregon is not contemplating capping the number of retail marijuana licenses. Nor is there interest in a merit-based scoring system, as was used in Illinois’ medical licensing process, or a lottery, as the state of Washington used to issue recreational licenses.

State licensing rules won’t determine who gets rich in the green rush, but they will determine who won’t.

Making the rules is a process that involves balancing policy objectives and weighing the interests of consumers, investors, businesses and the state. Oregon’s anticipated approach appears to give top priority to consumer access, but it may trigger a “survival of the fittest” struggle among early entrants and discourage early investment.


MJ Business Licensing Options

The uproar and ensuing litigation over Illinois’ secretive selection process suggests that licensing issues cannot be expected to fly under the radar anymore—too much money is involved.

Even without a limit on the overall number of business licenses, to be allocated according to one or another method, the application process in most states weeds out applicants with little or no chance of success. The initial application typically requires detailed operating plans, financial statements, lease information and a description of business structure. That is essentially where the process stops for liquor licensing in Oregon and where the retail marijuana licensing process may stop, as well.

The imposition of a cap, however, can do four things:

  • Limit availability to consumers and maintain prices at a certain level,
  • Make the licenses more valuable to licensees,
  • Make a small, new industry with a number of unknowns easier to regulate, and
  • Boost the potential for state revenue from licensing and application fees, as well as tax revenue from a smaller number of more successful businesses.

Allocating a limited number of licenses based on a scoring system could theoretically be a further step in the direction of selectivity, although the factors considered seem to relate more to the issue of business viability than customer care and service. It can also raise the specter of cronyism, especially when the process is secret.

Allocating the licenses on the basis of a lottery might be seen as an abdication of the state’s responsibility for quality control, a role that takes on added significance because of the absence of federal health and safety regulation.

A near infinite variety of combined systems may also exist, with a preliminary application followed by a scoring review and a lottery for the remaining contenders, subject to local licensing, for example.

Another alternative is the kind of sequenced approach that Colorado adopted, with initial license limits that sunset after a few months of regulatory experience. Which approach best addresses policy priorities will be a very localized issue, with all the potential for conflict that such an issue implies.


Time for Rand-like Analysis?

The Rand report, commissioned by Vermont to explore alternative approaches to legalization, may seem like a dry academic study of hot political topic, but it laid out alternatives for those faced with important policy decisions in a relatively objective way. Something of the same that examines the regulatory details of the licensing process might also bring some light to an otherwise potentially heated topic.

Anne Wallace is a New York lawyer who writes extensively on legal and business issues. She also teaches law and business writing at the college and professional level. Anne graduated from Fordham Law School and Wellesley College.

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