A Puffy’s Dispensary location is pictured on Oct. 1, 2024, on West Main Street in Rapid City. (Seth Tupper/South Dakota Searchlight)
John Hult, South Dakota Searchlight
VERMILLION – A Rapid City medical marijuana dispensary wants help from the state Supreme Court in obtaining a license for another location.
The state Department of Health wants the business to pay another $5,000 fee and complete another application. The department also says the business should have taken the dispute to an administrative hearing before making its case in a courtroom.
The state’s high court heard arguments on the issue Tuesday in Vermillion at the University of South Dakota Knudson School of Law.
The health department appealed a circuit court’s ruling in favor of Puffy’s, which operates two dispensaries in Rapid City but would like to open six more. Puffy’s also has a dispensary in Sturgis.
Rapid City’s medical pot rules allow for 15 dispensaries. But the city got 47 applications for those slots in 2021.
The health department stepped in to help the city decide which business would get licenses through a lottery system. That’s the framework written into state law for situations when dispensary applications exceed the number of dispensaries a local government allows.
That happened in three jurisdictions in 2021: Yankton, North Sioux City and Rapid City.
Puffy’s got seven of the 15 Rapid City licenses under the lottery.
According to the department’s rules on the lottery system, businesses that get licenses are required to launch within a year. If they don’t, the license goes to the next business in line.
In the case that ultimately led to Tuesday’s hearing in Vermillion, the 15th Rapid City license went to a company called Greenlight Dispensary, which didn’t use it within a year.
One of Puffy’s applications was number 16.
But instead of handing Puffy’s another license at that point – more than a year after the lottery – the health department told the company it was free to re-apply.
The owners didn’t appreciate that. Applicants are required to pay a $5,310 non-refundable fee and comply with the state’s medical cannabis regulations to be a part of the lottery. The department not only wanted Puffy’s to recertify that it complies with state law, but wanted another $5,310, which was the fee for each license in 2021.
The company took the state to court, asking that a judge force the state to hand over the license without the application and extra fee. The company won; the state appealed.
Health department: We need flexibility
Howard Pallotta was one of two lawyers representing the health department on Tuesday. He said Puffy’s failed to “exhaust administrative remedies” before filing its lawsuit last year.
Pallotta said Puffy’s should have paid the application fee and completed the paperwork a second time, and should have challenged the fairness of the department’s decision during an administrative hearing.
Such hearings are conducted by lawyers who make decisions in disputes over administrative rules. The losing party in such disputes can sue to reverse the decisions.
Justice Patricia DeVaney was among the justices to push Pallotta on that point: Don’t the state’s rules say the next business in line gets the licenses in these situations?
“They should’ve just submitted the application in protest and preserved their right to make the argument later?” DeVaney asked.
That would have been proper, Pallotta said. By the time Puffy’s filed its suit to demand the licenses, Pallotta said, 19 months had passed. Since licenses are good for a year, he said, it was “logical and reasonable” to expect Puffy’s to pay the fee and recertify that it complied with state law.
Businesses with licenses are required to pay the fee again every year, Pallotta said, and a lot of things “could have changed in 19 months.”
But the justices questioned that logic, given that the Puffy’s wasn’t renewing a license. It never had a license for the location in question.
“What’s your legal authority to say ‘pay us $5,000 for us to consider this?’” Chief Justice Steven Jensen asked.
During her rebuttal, Tamara Lee, an attorney for the state, said the fee is annual and there’s no guarantee to any business participating in a lottery. But Justice Mark Salter returned to Jensen’s question: How can you charge an annual fee to a business to renew a license it never had?
“You don’t have any free-standing authority that says you can ask them to pay a fee, yes or no?” Salter asked.
Lee conceded that the department doesn’t have that, but she argued that the authority is implied by the “totality” of the state’s cannabis laws and the importance of regulation.
“We’re talking about a schedule I controlled substance,” Lee said, referring to the federal category of drugs to which cannabis belongs.
Schedule I controlled substances are those with no medical use and a high chance of addiction. The federal government is currently considering a schedule change for cannabis. South Dakota voters authorized medical cannabis in their state in 2020, and a measure that would legalize recreational marijuana is on this year’s Nov. 5 ballot.
Puffy’s: If rule is valid, enforce it
Ryan Cwach, representing Puffy’s, faced down his own set of rapid-fire questioning from the justices.
That’s in part because of what’s happened with the company’s other pot licenses. Like Greenlight Dispensary, Puffy’s was not able to open all of its locations within a year of winning the licenses in the lottery.
Greenlight asked for an extension, was denied, and didn’t appeal that denial. Puffy’s also asked for an extension on its unused licenses, and also was denied, but it filed a lawsuit about it.
In that case, Puffy’s argued that the rules were unconstitutional because they treat businesses differently based on their location. A dispensary operating in a city with limits on the number of dispensaries must contend with a lottery; one operating in a city without limits does not.
In that case, Puffy’s had asked for a “writ of prohibition,” in which a court order stops an agency from enforcing a rule. But the judge dismissed that case without touching the constitutionality issue. Instead, he ordered Puffy’s to take its case for an extension to an administrative hearing. That hearing is pending.
The lawsuit that led to Tuesday’s hearing in Vermillion was filed separately. In it, Puffy’s asked for and received a “writ of mandamus,” which is a court order demanding that an agency enforce a rule — in this case, a rule saying the next business in line gets a license. Puffy’s asked for that even as it continued to argue that the rules are unconstitutional.
The justices homed in on that disconnect during Tuesday’s hearing at the law school. Why would you ask us to enforce a rule if you think that rule is unconstitutional?
The high court ought to make the call on constitutionality, Cwach said, because it needs to be answered and the Supreme Court has the authority to make the call.
If the justices decide that the rules are constitutional, he said, they ought to make the health department follow them.
But why, the justices asked, wouldn’t Puffy’s just pay the fee, resubmit the application and argue in an administrative hearing about whether the department broke its own rules?
“I think it’s unfair, because it’s essentially asking my client to pay $10,620 for their initial license when everyone else had to pay $5,350,” Cwach said.
The justices will issue an opinion at a later date.