Pot Shop Lottery Process Unfair To Out-Of-State Applicants: Suit

CHICAGO — With the first of three planned lotteries to award lucrative licenses to legally sell recreational marijuana set for Thursday, a Michigan-based cannabis company challenged the process in federal court.

Sozo Illinois claimed the new cannabis law aimed at diversifying ownership in the billion-dollar industry unconstitutionally discriminates against it and other companies with out-of-state ownership.

In a complaint filed in Chicago one day after Gov. J.B. Pritzker signed House Bill 1443 into law earlier this month, the company argues its due process rights have been violated by the law's addition of a new class of "social equity applicant" and creation new lotteries that it would not be eligible to win.

"Like changing the rules of the game at the start of the fourth quarter, the General Assembly’s 'fix' is fundamentally unfair and, as such, violated Sozo’s rights to due process and equal protection under the 14th Amendment to the U.S. Constitution as well as the parallel provision in the Illinois Constitution," the suit argues.

Sozo was founded by Aaron Rasty, an Iowa native and Texas resident who co-founded Chicago retail electric company BlueStar Energy in 2002 and sold it to AEP Energy in 2012. His Warren, Michigan-based cannabis corporation spent more than $350,000 to file 11 applications for pot shops licenses from the Illinois Department of Financial and Professional Regulation, according to its complaint.

Those applications were initially due May 2020, but executive orders issued by Gov. J.B. Pritzker in response to the coronavirus pandemic and subsequent legal challenges to the scoring of applications have kept new licenses from being issued.

The delays prompted the passage of new state legislation aimed at fixing some unintended consequences of the "social equity applicant" scoring system established in the 2019 Cannabis Regulation and Tax Act, which legalized the possession and retail sale of cannabis in Illinois starting last year.

To receive a perfect score and qualify for the lottery under the previous law, applicants needed to be veteran-owned. Only 85 percent of the maximum score is needed to qualify for the new lotteries.

The new law also creates a narrower definition of social equity applicant called a "social equity justice involved applicant," and it creates two additional lotteries with a lower bar to qualify in an effort to foster more diversity among the ownership in the cannabis industry.

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Sozo initially qualified as a social equity applicant by hiring eight people who lived in areas the state determined were "disproportionately impacted" by the war on drugs and two people who had either been arrested or had relatives who were arrested for low-level cannabis offenses.

Former state senator and current cannabis dispensary applicant Rickey Hendon has described that provision of the first version of the law, which allowed white business owners to buy their way into social equity status, as the "slave master clause."

U.S. District Judge Gary Feinerman had scheduled a hearing for Tuesday afternoon on Sozo's request that he issue an order halting the state's pot shop licenses lotteries, the first of which is set for Thursday.

The next two lotteries are scheduled for Aug. 5 and Aug. 19, subject to court orders.

UPDATE:

Sozo withdrew its lawsuit Tuesday ahead of the scheduled motion hearing. Company representatives released the following statement:

At Sozo Illinois, advancing social equity in the cannabis industry is a core part of our mission and values along with our community-first approach to engaging the people and communities we proudly serve.

To this end, Sozo filed a challenge against the state of Illinois’ corruption of the licensing process under the adult use cannabis program. While claiming to promote social equity, diversity and representation for systematically discriminated people in the cannabis industry, in reality the revised bill creates a deeply flawed and unconstitutional process for distributing cannabis dispensary licenses in which rules of qualifying applicants were changed after applications were scored. Sozo sought to hold the state of Illinois accountable to its problematic licensure rollout.

Sozo recognizes that the lawsuit could potentially delay licensure, which negatively impacts deserving social equity applicants, and was never the intention of the lawsuit.

Sozo maintains its belief in the importance of building viable and meaningful cannabis careers, a concept that provides the foundation for its entire operations. Sozo had hoped to replicate this method in Illinois, but after hearing direct feedback from other impacted and deserving cannabis social equity applicants, the company has made the difficult decision to withdraw from the lawsuit.

Withdrawal does not change the company’s strong belief that the process is fundamentally flawed. Unchallenged, the Illinois process will continue to benefit just a few connected and influential political insiders. Sozo will continue to work to support those negatively impacted by the war on drugs, including the investment in new talent and by supporting aspiring entrepreneurs in markets where it operates.