The Greenhouse Group, Llc v. Washington State Liquor And Cannabis Board ( 2020 )

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
GREENHOUSE GROUP, LLC, a
Washington limited liability company, No. 80803-6-I
Appellant, DIVISION ONE
v. UNPUBLISHED OPINION
WASHIGNTON STATE LIQUOR AND
CANNABIS BOARD, a governmental
agency of the state of Washington,
Respondent.
APPELWICK, J. — Greenhouse challenges the order of the Washington State
Liquor and Cannabis Board affirming denial of its application for a recreational
marijuana license in Seattle. Greenhouse claims the LCB review of its application
was not fair and impartial because the LCB did not review its application materials
on a “first come, first served” basis. We affirm.
FACTS
In 2015, the legislature passed the cannabis patient protection act (CPPA),
which standardized the delivery of medical marijuana by combining the
recreational and medical market under the regulation of the now-named
Washington State Liquor and Cannabis Board (LCB). LAWS OF 2015, ch. 70, §§ 1-
3 (Initiative 502). To accomplish this, the CPPA mandated the closure of collective
gardens that had been providing medical marijuana patients with cannabis. LAWS
OF 2015, ch. 70, §§ 49-50. The CPPA instead contemplated that medical
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marijuana patients would procure marijuana through licensed retail shops. LAWS
OF 2015, ch. 70, §§ 8. The CPPA gave the LCB authority to determine the number
of licenses to be awarded, but instructed that that determination must meet the
needs of medical marijuana patients. LAWS OF 2015, ch. 70, § 8(2). It also
compeled the LCB to adopt a competitive, merit-based application process to
review applicants in a fair and impartial way. LAWS OF 2015, ch. 70, § 6(1). The
CPPA mandated that license applicants be sorted into an order of priority. LAWS
OF 2015, ch. 70, § 6(1)(a). First priority is given to those who had previously applied
for a retail license prior to July 1, 2014, previously worked at a collective garden,
had maintained state and municipal business licenses, and had a history of paying
applicable taxes.. LAWS OF 2015, ch. 70, § 6(1)(a)(i). After the passage of the
CPPA, the LCB made an additional 222 retail licenses available across the state.
Of those, 22 were allocated to the Seattle market. The LCB began accepting
applications for new licenses on October 12, 2015. The application evaluation
process occurred in four phases. First, applicants submitted information to
determine their order of priority. Next, their application was sent to a licensing
specialist to gather all necessary information and ensure its accuracy.1 Once the
information was verified and fully reviewed, the application was sent forward to the
next phase, a supervisory review between the licensing specialist and their
supervisor. After the supervisory review, the application was forwarded to the LCB
enforcement division, who conducted a site inspection of the proposed store to
1 Because of the volume of applications, the LCB determined that only
priority 1 applications would move on to phase 2.
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ensure it complied with the LCB rules. After these steps, the application moved
forward for licensure.
In order to ensure a fair process, the LCB investigators were instructed to
review applications in the order received. This meant that they could not begin
work on a new application until they had done what they could with previously
received applications. But, if the investigator did not receive all documentation
necessary to complete their review, they were permitted to move on to other
applications before completing review of the incomplete application.
Greenhouse Group, LLC (Greenhouse) submitted its license application for
the Seattle market on October 14, 2015. On October 26, the LCB requested
documents to determine Greenhouse’s priority status.2 Greenhouse returned
these forms 29 days later, on November 24. An LCB employee testified that 29
days was an unusually long time to return these documents. They further testified
that other applicants returned their priority documents in 1-9 days. Applicants who
return these documents sooner are able to get their applications processed more
quickly.
After Greenhouse submitted its documentation, the LCB requested
additional priority documentation because the information it had provided was
incomplete. Greenhouse submitted this information on December 4. Greenhouse
was assigned priority 1 status on December 8. Its application was assigned to
licensing specialist Kimberly Chabot on December 17. Chabot was an
2
These documents included a priority verification form, financial, tax, and
employment documents for Rajiv Pottabathni, as well as information related to
Greenhouse’s formation and licensing.
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experienced licensing specialist who processed more successful applications than
any other licensing specialist in the state.
The same day she was assigned Greenhouse’s application, she called
Greenhouse and conducted an initial interview. She spoke with Rajiv Pottabathni,
who represented himself as the sole owner of Greenhouse. But, she was unable
to complete the interview because Pottabathni was unable to provide all the
information necessary. Chabot scheduled and completed the interview the next
day. She testified that it was very unusual for Greenhouse to be unable to provide
the necessary information at that stage in the process.
In that initial interview, Pottabathni indicated that he and his financiers had
already completed the required fingerprint submissions. Chabot communicated to
Pottabathni that he needed to give the fingerprint processor a specific code to
ensure that the results would get back to LCB quickly. Because Pottabathni’s
financiers did not have the code when they completed their fingerprints, they
needed to have their fingerprints retaken. They completed this on December 17.
Chabot testified that failure to provide the LCB code when getting fingerprints can
delay the process.
On December 20, Chabot sent Greenhouse a letter outlining the required
documentation she would need to move forward with Greenhouse’s application.
Greenhouse submitted the bulk of these documents on December 29. Chabot
testified that many applicants were able to return this information within 24 hours.
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The record is not clear when Chabot reviewed these submissions in sufficient
detail to request additional documentation from Greenhouse.3
Greenhouse’s financial disclosures raised several “issues” for Chabot. One
of the e-File forms submitted with its priority determination did not conform to IRS
formatting. Pottabathni’s name was different on the form and it appeared to
Chabot to have been altered. Chabot did not think that she could accept the
document. She consulted with her supervisor, who agreed.
The tax documents also indicated that Pottabathni earned roughly $7,040
in wages. But, Pottabathni’s financial disclosures included with his December 29
submissions revealed that he had about $190,000 in various bank accounts. Yet,
Pottabathni owned no stocks, real estate, or vehicles of any kind. Chabot
considered these disclosures to be “unusual” and “a red flag.”
At this point, the record does not indicate that she notified Pottabathni of the
outstanding concerns she had. Chabot still had not received notification that the
necessary fingerprints had been received. While waiting for Greenhouse’s
fingerprints to clear, Chabot worked on other applications. A supervisor testified
that investigators were not expected to request additional documentation from
3 Chabot testified that she “reviewed throughout the process . . . popping in
and out as often as the process would allow.” But, she later testified that in
Greenhouse’s case, she didn’t review documents “until later in the review.” On
January 5, Chabot responded to an inquiry from Pottabathni by indicating she
hadn’t yet reviewed his submitted documentation in enough detail to request more
information. She again declined to request additional documents in a January 10
e-mail with Pottabathni because she was “still reviewing” Greenhouse and other’s
applications. She testified that she was aware that Pottabathni’s criminal history
was still outstanding at that time. She testified she was “still reviewing” on January
14.
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applicants until the fingerprints had cleared. Chabot did not claim she could not
have notified him about the need for additional documentation.
From December 29 to January 11, Chabot and Pottabathni exchanged
numerous e-mails regarding Greenhouse’s license application. On December 29,
Pottabathni e-mailed Chabot to inquire about his application. Chabot responded
that she had received his application and was able to set up an interview for
January 14. On January 5, Pottabathni e-mailed Chabot inquiring as to the status
of his application, and requesting that she send a copy of the local authority notice
to his landlord. Chabot responded the same day saying the LCB does not provide
these notices to landlords. She encouraged him to have his landlord contact the
local authority directly. She also indicated that she had not yet reviewed his
documentation in detail and would get back to him as soon as she had. On
January 7, Chabot e-mailed Pottabathni asking for an update on the build out
process for his retail location. Pottabathni provided this update that same day.
On January 8, Pottabathni e-mailed Chabot for assistance with submitting
an addendum to his lease, and inquired about the status of the local authority
notification. Chabot responded on January 10 with instruction for submitting a
lease addendum. She also indicated that the notification to local authority had not
been sent but indicated that she sent it that day. Chabot testified that any delay
related to the local authority notice would not prevent an applicant from moving to
the next stage or delay document review.
On January 11, Pottabathni e-mailed inquiring as to the status of his
application and indicating he may want to move his application to a new location.
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On January 14, Chabot called Pottabathni and informed him that Seattle was
getting close to its allotment of licenses. She also sent a notification letter
informing Greenhouse in writing of this fact. All Seattle applicants were given a
similar letter and asked to sign and return it if they wished to move forward with a
Seattle application. That same day, she sent Greenhouse’s application to
“traceability” to ensure that Greenhouse’s system functioned properly with the LCB
system.
On January 17, Chabot called Pottabathni again and asked if he wanted to
continue moving forward with a Seattle license, or try to secure a license in another
location. He was unsure how he wanted to proceed and needed to “check with his
financiers.” He committed to e-mailing back on January 19. On January 19, he e-
mailed Chabot indicating that his financiers told him they were not willing to move
to another location. This, combined with his commitments to his current location,
caused him to decide to proceed with Seattle licensure. Chabot testified that it
was “very unusual” for one to be unsure if they wanted to move forward with Seattle
licensure right away. She further testified that Pottabathni’s frequent need to
consult with others before making decision raised concerns for her that he was not
the only party in interest, which would require additional documentation.
Also on January 19, Chabot sent a corrected local authority notice to Seattle
to correct a mistake in the stated address. She then called the city to ensure there
were no further issues with the notice.
On January 20, Greenhouse e-mailed Chabot asking for the application to
be moved forward to final inspection. Chabot responded that the application would
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be moved forward to supervisory review once all the documents were completed.
She e-mailed her supervisor, Frank O’Dell, that day to set up a meeting about the
application. Later that day, LCB received the results of the criminal history check
from the Washington State Patrol.
On January 25, Chabot requested additional tax information and insurance
information, and scheduled a conference call for January 28 with herself, her
supervisor, Pottabathni, and his attorney to discuss additional requests.
On January 28, Seattle reached its allotment of licenses. Chabot called
Greenhouse to inform it of this, and indicated it would have 30 days to find a new
location where licenses were still available. At the time, Greenhouse’s application
was not ready for final inspection. At least two other applications were ahead of
Greenhouse when licensure closed.
Also on January 28, Chabot, her supervisor, Pottabathni, and his attorney
met. Chabot outlined the additional documents needed to move Greenhouse’s
application forward. She sent a formal written request for these documents on
January 31.4 Greenhouse returned this documentation on February 19.
Upon reviewing the additional tax information, the amounts were different
than what Greenhouse had initially submitted. Greenhouse subsequently provided
a letter from their accountant indicating that they had “made a mistake.” Chabot
testified that she had never encountered a mistake of that sort in an application
before.
4 This request included a request for documents that had previously been
requested for another of Greenhouse’s applications. The January 31 request
included additional documentation specific to the Seattle application.
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The LCB then worked unsuccessfully with Greenhouse for over a year to
find an alternative location with licenses available to move the application forward.
Greenhouse’s application was withdrawn on July 3, 2017.
Greenhouse initiated an administrative appeal of the withdrawal. The
administrative law judge affirmed the withdrawal. Greenhouse appealed to the
LCB. The LCB adjusted some findings of fact from the initial order, but affirmed
the withdrawal. Greenhouse petitioned for judicial review with the superior court.
The superior court affirmed the LCB’s order. Greenhouse moved for
reconsideration. The superior court denied the motion.
Greenhouse now appeals to this court.
DISCUSSION
Greenhouse argues that the LCB did not evaluate his application in a fair
and impartial manner because it did not review his submissions in the order they
were received. He argues that the LCB’s final order affirming the withdrawal of his
application failed to appropriately consider critical undisputed facts concerning the
order in which submissions were reviewed and is therefore not supported by
substantial evidence and is arbitrary and capricious. Greenhouse does not
specifically challenge the factual accuracy of any of the LCB’s factual findings in
his assignments of error. Rather, it “takes issue” with several findings of fact while
acknowledging “many of the findings are accurate.” It argues that “the placement
of facts inaccurately in the chronology of events and the absence of reference to
many critical undisputed facts, renders the findings misleading and leaves the
conclusions of law without adequate support.”
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Judicial review of the denial of a marijuana license by the LCB is governed
by the Washington Administrative Procedure Act, chapter 34.05 RCW (WAPA).
Haines-Marchel v. Wash. State Liquor & Cannabis Bd., 1 Wash. App. 2d 712, 727,
406 P.3d 1199 (2017), review denied, 1 Wash. App. 2d 712 (2018), cert. denied, 139
S. Ct. 1383 (2019). When reviewing the final administrative decision, we sit in the
same position as the superior court, applying the standards of WAPA directly to
the record before the agency. Id. We grant relief from an agency adjudicative
proceeding if, inter alia, the order is not supported by substantial evidence or the
order is arbitrary or capricious. RCW 34.05.570(3). The party asserting invalidity
bears the burden of demonstrating the invalidity of agency action on review. RCW
34.05.570(1)(a). An agency’s order is supported by substantial evidence if any
fair-minded person could have ruled as the agency had after considering all the
evidence. Callecod v. Wash. State Patrol, 84 Wash. App. 663, 676 n.9, 929 P.2d
510 (1997). An agency action is arbitrary and capricious if it is “‘willful and
unreasoning and taken without regard to attending facts or circumstances.’” Wash.
Indep. Tel. Ass’n v. Wash. Utils. & Transp. Comm’n, 149 Wash. 2d 17, 26, 65 P.3d
319 (2003) (quoting Rios v. Dep’t of Labor & Indus., 145 Wash. 2d 483, 501, 39 P.3d
961 (2002)). Where there is room for two opinions, an action taken after due
consideration is not arbitrary and capricious. City of Redmond v. Cent. Puget
Sound Growth Mgmt. Hearings Bd., 136 Wash. 2d 38, 47, 959 P.2d 1091 (1998).
Both the “substantial evidence” and “arbitrary and capricious” tests are “highly
deferential.” ARCO Prods. Co. v. Util. & Transp. Comm’n, 125 Wash. 2d 805, 812,
888 P.2d 728 (1995).
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Greenhouse asserts that the facts are incomplete and misleading because
the LCB did not consider critical undisputed facts. In particular, Greenhouse
alleges that the LCB failed to consider that other applicants were able to secure
review of their documents before Greenhouse, despite submitting these
documents after Greenhouse.
But, the LCB did consider these facts. It simply came to a different
conclusion as to their import. Greenhouse’s core contention is that the LCB’s first
come first served policy required Chabot to send Greenhouse a request for
additional documents as soon as the “red flags” raised by its December 29
submission of documents became apparent. The LCB acknowledged that other
applicants were able to secure review of their documents after Greenhouse had
submitted its materials. However, it distinguished those applications because they
did not have the same “red flags” and “concerns” that slowed Greenhouse’s
application. While Greenhouse is quick to point out that other applications had
concerns or required additional documentation, the record supports that Chabot’s
concerns with Greenhouse’s application were more serious. Chabot testified at
length as to the severity of the deficiencies with Greenhouse’s December 29
submissions, saying they were “unusual,” “very unusual,” and that she “never
encountered anything like that.”
While it may be true that Chabot could have stopped work on other files
when she received the December 29 submissions, reviewed them and immediately
requested additional information, she was not required to do so. The LCB
concluded that the delay in processing the application was reasonable given the
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concerns and red flags specific to Greenhouse’s submission. It further considered
Greenhouse’s contention that the LCB was required to halt consideration of other
applications in order to address the deficiencies with Greenhouses submissions.
It concluded that such a policy was not necessary or practical.
We agree that the CPPA does not mandate such conduct under a first
come, first served policy. LAWS OF 2015, ch. 70, § 6. It requires only that the LCB
adopt a competitive, merit-based application process which reviews applicants in
a fair and impartial way. Id. To accomplish this, the LCB instructed its licensing
specialists to review documents in the order received. But, if an investigator did
not receive all documentation necessary to complete their review, they were
permitted to move on to other applications before completing review of the
incomplete application.
Such was the case here. Greenhouse’s December 29 submission raised
red flags that were more serious and unusual than other applications. And, the
criminal history report had still not been returned on Greenhouse’s principal and
financiers. Chabot did not cease work on Greenhouse’s file during this time. She
engaged in numerous e-mails and telephone communications answering
questions and requesting information.
The same day the fingerprints cleared, Chabot set up a meeting with her
supervisor about the application. She set up a subsequent meeting with
Greenhouse to outline what additional information she would require. Before that
meeting occurred, Seattle reached its allotment of licenses. Nevertheless, the LCB
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continued to work with Greenhouse for over a year to secure a license in another
area.
A fair-minded person could readily conclude that the steps Chabot took
were fair and impartial. She responded to concerns and red flags that were more
serious than other applications by waiting until she had received all relevant
information and promptly setting up a meeting with her supervisor. The LCB
considered the facts and attending circumstances surrounding the withdrawal, and
concluded the evaluation process was fair and impartial. Though Greenhouse
views the facts and comes to a different conclusion, the LCB decision is supported
by substantial evidence and is not arbitrary and capricious.
We affirm.
WE CONCUR:
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