Colorado towns face lawsuits over points-based marijuana licensing systems

Cities and towns in Colorado have devised all sorts of ways to decide how many pot shops can open and where, but two communities using a points-based system to evaluate and select prospective recreational marijuana businesses — Aurora and Thornton — are running into legal hot water.

Aurora is facing a lawsuit alleging that it didn’t follow its own rules for ranking pot shop applicants for the two dozen licenses it issued. Thornton, which has four available licenses for recreational marijuana retailers, could get hit with a similar challenge in the coming weeks.

The two cities use a points-based system as part of their marijuana regulations. Other communities use random lottery drawings (Adams County), establish hard numerical caps on a first-come-first-served basis (Wheat Ridge) or put in place buffer zones (Louisville) to manage the number and location of shops.

The points-based ranking systems like those in Aurora and Thornton allows a city to more thoroughly vet business owners and limit licenses to entrepreneurs with solid business plans, adequate financing and clean criminal backgrounds, but inconsistencies in applying those formulas can subject community leaders to accusations of subjectivity, favoritism and fraud.

“The problem with a points system is that it’s going to have winners and losers and that opens everything up to scrutiny and litigation,” said Sam Kamin, a University of Denver law professor who is an expert in marijuana law.

That is exactly what Stan Zislis, co-owner of Silver Stem Fine Cannabis, alleges in a lawsuit he filed against Aurora after it denied him a license to open a shop near East Colfax Avenue and Tower Road. The city established a scoring and ranking system in 2014 after it decided to allow recreational marijuana sales, awarding points to applicants in different categories of business expertise and preparedness. It limited the number of licenses citywide to 24 — four stores in each of the city’s six wards.

The case, which goes before a judge in Adams County on Thursday, alleges a number of things Aurora did or didn’t do in evaluating Silver Stem for a license. But the most egregious violation came down to what Zislis contends was a mathematical error that the city refused to fix.

Specifically, he claims that the Aurora Marijuana Enforcement Division (AMED) erroneously rounded up a score in evaluating a competing applicant’s operating plan rather than properly rounding it down, resulting in an overall score that knocked Silver Stem out of contention. A correct rounding of numbers would have resulted in Silver Stem and the competing applicant getting the same score, but the suit alleges the city “manipulated scores in order to avoid a tiebreaker scenario.”

The suit claims that Jason Batchelor, who was Aurora’s finance director in 2014 when Silver Stem’s application was denied, “acknowledged that AMED committed a clear mathematical error” but concluded that Silver Stem “was entitled to no relief.”

Aurora officials declined to comment on the suit, citing the ongoing litigation.

Zislis, whose company has five locations in Colorado and one in Oregon, said there’s nothing inherently wrong with a points-based system as long as it is utilized fairly.

“It’s not the scoring system we’re challenging — it’s the fact that they meddled with the scores to avoid a tiebreaker,” he said.

Since Silver Stem’s suit was filed against Aurora, Zislis has cited a number of other problems with the city’s marijuana licensing system. Those include using a city employee to review applications, which Zislis says doesn’t qualify as an independent arbiter, and the fact that a license-holder has gone beyond the city’s two-year window to start operations.

Boulder marijuana attorney Jeff Gard said his client had a similar experience in Thornton, which last year legalized the sale of recreational pot and decided to use a point system like Aurora’s. Gard claims a competitor’s application for one of the city’s four licenses included incorrect criminal background information, but despite bringing the issue to Thornton’s attention, Gard said the city “didn’t act on it.”

“They’re not following their own point system,” he said. “When they created the rules, they’re binding on both parties.”

Gard said his client, which didn’t get a license, will likely sue Thornton over the issue.

Thornton’s assistant city manager, Rob Kolstad, said the city disagrees with Gard’s accusation. Kolstad said Thornton chose to use a ranking system because “the evaluation process would provide the city with the best applicants, the best businesses and good neighbors.”

Licensing disputes are not exclusive to Aurora and Thornton. Last year, the Pig N’ Whistle dispensary became the first pot business to beat back a decision by Denver to deny it a license after two judges ruled in the store’s favor. And in 2015, a pot entrepreneur locked horns with Wheat Ridge after the city set a cap of five stores in response to neighborhood complaints about his plans to open a store in a residential area. His store would have been the city’s sixth.

This story was first published on DenverPost.com

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