An appellate court is forcing the city of Chula Vista to keep a cannabis company in the running for a license to operate in the city. One problem, though, is the city has no licenses left to hand out.
The case has brought attention to the allegedly petty and arbitrary way the city and its main consultant on the permitting process has handled applicants and it is the latest folly in the mess the city’s cannabis permitting system has become since the City Council authorized dispensaries to open within city limits. Delays and lawsuits have plagued the process and only a few entities have managed to make their way through it.
A California appellate court in July sided with the company Caligrown, which had applied for one of the licenses to operate a storefront dispensary. The court found that Chula Vista’s rejection of the Caligrown’s storefront license was “arbitrary and capricious” and an abuse of the city’s regulations.
In their ruling, the appellate judges ordered that Chula Vista keep Caligrown in the running for a permit. But the city has already promised or given away all its licenses and some of those businesses are already operational.
Chula Vista’s ordinance allows for eight storefront retail cannabis business licenses and one delivery service per each of the four City Council districts. To get one, applicants must go through two rounds of vetting and demonstrate upfront that they have $250,000 in liquid assets, a business plan, an operating plan and relevant qualifications.
During the first phase, the city’s finance director and police chief review the application to make sure everything checks out and the applicant does not also have a criminal record. Assuming everything’s good, the applicant then goes through a scoring process by a consultant., as the second phase.
Or at least that’s how it’s supposed to work.
Caligrown sought a permit to open a storefronts in City Council Districts 1, 3 and 4 in 2019 and 2020. But the police chief faulted the company for not submitting fingerprints and because one of the principals of the company was once convicted of petty theft. That principal, however, only owns 2 percent of the company and the conviction, from 1964, had been expunged.
To review the application, the city also relied on an outside consultant, Matthew Eaton of HdL, who gave Caligrown a relatively low score because the information in the application was formatted in a way he didn’t like, according to Eaton’s sworn testimony from earlier hearings. It was, in other words, a problem of organization, not of substance.
“They didn’t follow their own rules,” said David Demian, Caligrown’s attorney. “The legal system is holding the city accountable to follow its duly enacted ordinance, and its duly adopted, publicly adopted, and published regulations. It’s just not certain what can or will happen next.”
How Things Worked
The legal setback has put HdL under scrutiny. The firm is paying Chula Vista’s legal fees in the lawsuit and has faced tough scrutiny in other California municipalities for its cannabis licensing consultancy services, as well as locally. HdL no longer works with Chula Vista.
A critical 2019 report on HdL in MJBizDaily quoted Kelly Bacon, a former deputy city manager at Chula Vista, who acknowledged that the consultant’s relationship with other municipalities wasn’t quite so rosy and, said she hoped HdL would bring “a fresh set of eyes to the process and that it’s fair and impartial.” When asked earlier this year, Chula Vista declined to provide a reason for why it is no longer contracted with HdL, nor when the relationship was severed. But Anne Steinberger, a representative for the city, added that the city’s contract with the consultancy was limited to the initial phase of the application process and that it has been processing the rest of the applications internally.
In early 2020, when HdL was still processing the city’s applications, Caligrown complained after receiving its rejections, claiming, among other things, that the scoring process was supposed to happen in Phase 2 and they weren’t aware they were being evaluated. Then-City Manager Gary Halbert ordered that the consultant re-review the application but the consultant ended up pushing up the score in only one of four relevant categories, and didn’t re-score the rest of the categories. Again, the application was denied, so Caligrown sued after its application was again denied.
But while the lawsuit was ongoing, the city continued to award licenses, despite being asked not to in Caligrown’s complaint.
Compounding the problem, an attorney representing the city, Scott Taylor, was asked during the appeal court hearing on July 13 if the city had already given away its licenses in the same districts where Caligrown had applied. At the time, Taylor said he didn’t have the “most up-to-date information” but that, as far as he knew, no licenses had been issued.
Turns out the city they had been issuinggiving out licenses in those areas. Diane Howell, a Chula Vista spokeswoman, confirmed last week in an email that the city has in fact issued the maximum number of storefront licenses in Districts 1, 3 and 4, though some of them still require state approval.
And not only were they giving out licenses in those areas, the city was giving licenses to applicants who hadn’t even applied for those areas. Both March and Ash and California Holistics, for instance, received a license in District 1 despite neither entity submitting an application for that district. That is permissible in the city’s rules so long as the city can claim that it has exhausted all its other applicants in the original district.
Laura Wilkinson, who owns Caligrown, contends that the city never exhausted its list. “I want the licenses, and the appellate court instructions were clear,” said Wilkinson. “Had they followed their own ordinance I would be operating in District 1 and probably 3 and 4 as well.”
March and Ash’s general counsel and co-owner, Bret Peace, said he was happy to receive an email earlier this year granting his company a license in that district, and that he does not know how or why they received it, since they had initially applied in another district. California Holistics did not respond to a request for comment.
March and Ash is one of several local companies that have managed to succeed regularly when municipalities here and across the state offer licenses to operate.
The companies that succeed all share common traits but one of them in particular: They have built up political connections and a team of consultants. March and Ash, in fact, has worked with Grassroots Resources, a political consulting firm that employs Chula Vista City Councilwoman Andrea Cardenas.
When asked at a live Voice of San Diego podcast in June about her ongoing financial relationship with outside interests while serving on the City Council, she replied that she’s careful to keep the two separate and recuse herself when necessary.
“I don’t have any clients, really – I do a lot of the admin stuff, and you know, since I got elected, that’s been an even bigger market. It’s always been very difficult for people to force me to work on something that I’m not passionate about,” she said. “And so, even now when we’re talking about the cannabis industry, I’m very careful not to blend those lines, because if it doesn’t look good, it’s not good.”
Anne Steinberger, the city’s marketing and communications manager, also told Voice of San Diego that the cannabis licenses are handled by city staff and that council members do not direct or make decisions on applications.
Going forward, part of the appellate court’s decision requires the city to not only rescind its rejection of Caligrown but to also re-score the application. This was originally done by HdL, but HdL is no longer working for Chula Vista.
It’s not clear at this point how the city intends to comply with the appellate court’s decision because it can’t easily take a license away from one operator and give it to Caligrown without instigating another lawsuit. The city attorney’s office said it was still evaluating the ruling. Chula Vista’s City Council held a closed session discussion on the topic on July 26, but the details are not public.
One possible remedy: elected officials recommend the city increase the number of licenses on the books. Chula Vista’s ordinance allows the city to increase the number of authorized cannabis storefronts, but “only after receiving and considering a report from the City Manager regarding any observed or projected adverse impacts on the community from such businesses.”
Another remedy could include rescinding licenses. According to the city, licensees are required to sign an operating agreement that includes, among other terms, licensees’ obligation to “indemnify and release” Chula Vista in the event of a legal challenge to its license approval process.
Whatever the case, the complaints raised by Caligrown are not the only ones that the city will have to contend with. There are still two pending lawsuits against the city alleging similar discrepancies in its licensing process.
Ken Sobel, a lawyer and owner of Cannabis Village, claimed Chula Vista failed to follow its own rules in determining who gets a business license and that HdL didn’t follow the city’s rules in scoring applicants.
Urbn Leaf, one of the major dispensaries throughout the state, also filed suit, claiming the city’s licensing process is “baffling … arbitrary, capricious, and contrary to the law.” Its application was denied for allegedly violating the city’s zoning rules in 2012, when owner Will Senn operated a medical marijuana dispensary in San Diego.
Senn eventually settled with San Diego, which admitted no wrongdoing, but it still wasn’t good enough for Chula Vista, which for years has battled illegal dispensaries, to award Urbn Leaf a license.