In New York, Legislators Debate the Shape of a Future Adult-Use Marketplace

New York legalized medical cannabis in 2014 and started its formal marketplace with only five licensed operators in the state.

The limitation on the number of licensed operators made it difficult for medical cannabis to make a notable impact in the state. 

"As the author of the original Compassionate Care Act, which is the medical program, I'm not surprised that it hasn't had that great of an economic impact, simply because the governor at the time was not a big fan," New York State Sen. Diane Savino said of Gov. Andrew Cuomo, who has been in his executive role since 2011. "He was very skeptical about legalizing cannabis for medical purposes and he was greatly concerned that the program could lead to all sorts of problems, but he's obviously changed his position since then."

Savino said that the program's original limitations created restrictions on a whole host of things—most importantly, patient access.

With only 20 operating medical dispensaries in a state with over 19 million people, it is no surprise that there was limited patient access at first. Since 2016, it has been expanded to 10 license holders, with 40 dispensaries statewide, she said.

According to the legislation, medical cannabis businesses must be vertically integrated. The thinking is that vertical integration allows one to have tighter control over regulatory compliance, but it also drives up the cost of running a cannabis operation, making it far more difficult for small businesses and entrepreneurs to get into the cannabis business, she said.

"More importantly, it's an expensive business to stay in," Savino said. "You have to have a lot of liquidity, you have to have access to capital, you have to have the ability to sustain yourself, and you can't turn to traditional lending sources. So, when you have a vertically integrated market, it seriously narrows the group of people who can participate."

The medical program sunsets this year, which means the law expires. Savino expressed that it is a common technique in legislatures where a bill will expire at a particular time requiring it to be renewed, expanded, amended, or it ends because the program is no longer necessary.

"That was another requirement that the governor felt very strongly about back when he didn't believe in cannabis," she said. "He was worried that if we had to have a tightly controlled program and things got out of the way, we should be able to shut it down. In this instance, we will extend it, and that is going to give us the chance to really improve the medical program in a way that will be far more meaningful than the original program."

Savino said the New York state legislature plans to remove the vertical integration requirement when they do the extension of the law, which will open it up to all types of licenses.

This is all happening on a parallel track to the discussions about the adult-use market in New York, she said.

In early January, Cuomo called for the legalization of adult-use cannabis in the state, leaving some wondering what the timeline will be.

Since New Jersey is in the process of implementing adult-use cannabis sales (legalized by voters in November 2020), Joshua Horn, co-chair of Fox Rothchild's Cannabis Law practice and a leading lawyer in cannabis law, thinks New York has no choice but to press forward with an adult-use program.

"If you think about New Jersey or New York City, in particular, there are almost 20 million people in a very concise area," he said. "People can just drive over the George Washington Bridge and go to a dispensary on the other side and drive back. So, I think New York will need to address that."

Horn suspects that the legislation will keep moving forward this year; however, even if New York legalizes adult-use cannabis soon, it could take two to three years before dispensaries open and the product is available for sale.

"Right off the bat, the only people who could participate would be the medical growers, who, if they're allowed to participate, the governor's bill allows for the medical license holders to have some role in the adult-use market, but not to dominate it," Savino said.

She said that several activists believe that medical dispensaries shouldn't be given any role in recreational cannabis. If New York plans to address that, it could take longer before legal products go on the market.

"The governor has his proposal, and the legislature has theirs," she said. "So, they're going to have to negotiate, and if they can't come to an agreement, it could fall off the table again the way it did last year or the year before."

If the bill passes, changes will have to be made for adult-use cannabis to impact the New York economy significantly.

"If New York says the existing 10 [businesses] are the only ones who can implement adult-use, then I think it will really have no economic benefit," Horn said. "New York is going to need to issue a fair number of permits. If it's a robust program with over 100 permits, they have a greater likelihood of serving a greater population. It can also be taxed, just like gambling or alcohol, and then the state should do very well, but the program can't be so constrained and limited; otherwise, it's not going to work."

Savino says it is hard to predict the type of economic impact that legalization will have on the state, as it could take a while to get it up and running.

"Even the most conservative projections are about a full year or two years from now," she said. "Projections are about $350 million, and to the extent that more states come on board with adult-use marijuana, it cuts into your own state's profit margin. And what I say over and over is if we continue to look at marijuana as a cash crop, we're missing the boat."

Today's technology makes it very easy and convenient to purchase cannabis and get it directly delivered to one's house, without consumers having to worry about data privacy issues. That is what New York is up against, Savino said.

"So, we have to keep that in mind, that it's not about the money," she said. "If we make it about the money, then we're never going to make any."