Illinois Marijuana: Let The Lawsuits Begin

With cultivation and dispensary license winners announced only last week, the era of legalized medical marijuana is barely dawning in Illinois. But, predictably, litigiousness is also starting to rear its ugly head. If you had asked us two weeks ago what people would have been itching to sue about, we would have guessed the state’s delay in issuing licenses (even as outgoing Governor Quinn’s administration had apparently scored the applicants). After newly-installed Governor Rauner seemed in no hurry to follow through, many were surprised by last week’s announcement, and the more likely class of plaintiffs now seems to be application losers, rather than the broader group of license hopefuls. Suing a government over a license denial is not uncommon.

The Shelby County Courthouse

Cue Shiloh Argonomics, LLC.

Shiloh applied for a grow permit in downstate Illinois, losing out to Shelby County Community Services Inc (SCCS). Operating as a not-for-profit entity, SCCS has long provided assistance and work programs to the developmentally disabled, and counseling and mental health services to the Shelbyville, IL community, and hoped to integrate medical marijuana into its offerings. The Department of Agriculture evidently agreed, and authorized Shelby County Community Services to grow and process marijuana in District 10.

SCCS’s status as a non-profit is the source Shiloh’s grievance. In a letter to the Illinois Attorney General asking the AG to revoke SCCS’s authorization, Shiloh argues that because SCCS must certify that, as a non-profit, it will not violate federal law, its application should be invalidated. Our own Robert McVay rightfully pointed out in the Chicago Tribune that SCCS’s non-profit status won’t win it any favors with the IRS; the same draconian laws that apply to marijuana businesses are enforced against non-profit organizations as well. It remains to be seen whether the AG will bite, or if Shiloh will try to convince a court it has standing to pursue a claim against SCCS.

Licensing lawsuits by a rejected license applicant against someone granted a license can be tough to win in this industry. We’ve seen Shiloh’s argument used defensively before — by a municipality denying a state-legal marijuana enterprise a general city business license. In such cases, the municipality justifies its denial of the business license on the grounds that the canna business contravenes required certifications or municipal code that the business license applicant will not violate local, state, or federal law. And our marijuana litigation lawyers have been involved in a number of disputes between applicants where one has claimed that the other should have been disqualified on other grounds.

But we think this is the first time anyone has used the argument offensively–Shiloh is effectively threatening to sue another applicant for having agreed to abide by all laws.

In all likelihood, Shiloh will have a hard time persuading a court that it has standing to pursue its claim. For one, SCCS’s purported transgression isn’t an affront to Shiloh. SCCS’s status as a tax-exempt entity is really an issue between SCCS and the IRS. While SCCS may be putting its tax-exempt status at risk, that really shouldn’t play any role in whether or not it receives a license from the state. Certifications to the state that SCCS will not violate federal law may be more problematic, but have been overlooked in similar instances in other states. Not only that, Shiloh will have a tough time being able to prove it has been injured by anything SCCS has done. No applicant was guaranteed a license. We do not know how Shiloh scored or if it was indeed the second place point-getter, which would make its argument at least somewhat stronger. Still, let’s face it–no one involved directly with marijuana is not violating federal law, and it would therefore surprise us if the court were to hold that a certification otherwise on some paperwork carries much weight. Just look at our disclaimer on the right, which says the following:

Please be mindful that possessing, using, distributing and selling marijuana are all federal crimes and that this blog is not intended to give you any legal advice, much less lead you to believe that marijuana is legal under federal law. Please also note that even though marijuana is illegal under federal law, you will need to pay federal taxes just as though you are a legal entity. This is true even if you are a state law not-for-profit entity.

If we had to bet on an outcome, our money would be on both the AG and the Illinois courts taking a pass. Either way, this conflict certainly will not be the last between a rejected and a granted license applicant.