New Jersey Appellate Division Rejects Constitutional Challenges To Department Of Health’s Decision Not To Expand Number of Medical Marijuana Alternative Treatment Centers

In 2016, the New Jersey Department of Health (“DOH”) issued its bi-annual report on medical marijuanathe state of the New Jersey Compassionate Use Medical Marijuana Act (the “Act”).  In its report, the DOH recommended that the State of New Jersey not expand the number of medical marijuana Alternative Treatment Centers (“ATCs”) permitted to serve patients beyond the statutory minimum of 6 that were issued permits when the Act came into effect in 2011.  The DOH’s decision was obviously disheartening to potential patients who do not have reasonable access to the 6 operating ATCs and to entrepreneurs looking to get into the marijuana business.   medical marijuana

Hypothetically speaking, would a person who wants to open an ATC in New Jersey challenge the constitutionality and legality of the New Jersey Department of Health’s decision in its 2015 bi-annual report to not expand the number of ACTs in New Jersey?   The short answer is yes; however, these challenges would have little chance of succeeding based on the New Jersey Appellate Division’s decisions in Natural Medical Inc. v. New Jersey Dept. of Health & Sr. Services, 428 N.J. Super. 259 (App. Div. 2012) and Caporusso v. New Jersey Dep’t of Health & Senior Servs., 434 N.J. Super. 88 (App. Div. 2014).

  1.  Challenging the statutory interpretation of N.J.S.A. § 24:6I-7 which requires the DOH to accept applications from entities for permits to operate as ATCs.

 

One way to challenge the DOH’s current refusal to accept new permit applications for ATCs would be to submit an application to the DOH and take a direct appeal to the New Jersey Appellate Division when the DOH does not accept the application or act on it.   The argument on appeal would be that the plain language of N.J.S.A. § 24:6I-7(a) mandates that the DOH accept and consider permit applications for ATCs regardless of need.  This is because the statute unequivocally states that “the department shall accept applications from entities for permits to operate as alternative treatment centers, and may charge a reasonable fee for the issuance of a permit under this section.”  Notwithstanding the apparent clear mandate embodied in this sentence for the DOH to accept applications, the New Jersey Appellate Division held otherwise in Natural Medical Inc. and Caporusso.

In Natural Medical Inc., the appellants, a for-profit corporation and its principal, sued the DOH, alleging that the DOH’s decision to accept applications to be ATCs only from non-profit entities violated the Act.  Specifically, the appellants argued that because N.J.S.A. § 24:6I-7(a) says the DOH “shall accept applications”, they had an unqualified right to apply for permits to operate ATCs and to have their applications processed and evaluated irrespective of the State of New Jersey’s need to have more ATCs to service patients.  The Appellate Division rejected this argument and held that the first sentence in N.J.S.A. § 24:6I-7(a) needed to be read together with the immediate sentences that followed it, which charge the DOH with the responsibility to “ensure the availability of a sufficient number of [ATCs] throughout the State, pursuant to need . . . .”N.J.S.A. 24:6I-7(a).  The Appellate Division noted that although the use of the term “shall” is generally indicative of the strength of the Legislature’s intent, it has been construed on occasion as directory, suggestive or instructive, rather than imperative, where it relates to the form and manner in which the law is to be carried out and more clearly implements legislative intent.  Accordingly, the Court found that the ordinary common meaning of “shall” may be overcome by something in the character of the legislation in the context which will justify a different meaning.

With this framework in place, the Appellate Division held that the first sentence in N.J.S.A. § 24:6I-7(a), when considered in full, does not allow for automatic licensure.   The Court further held that it does not express an explicit legislative commitment to an unlimited number of ATCs, because the “shall issue” language in N.J.S.A. 24:6I-7(e) is restricted by the qualification: “if the [D]epartment finds that  issuing such a permit would be consistent with the purposes of this [A]ct and the requirements of this section are met.”  The Appellate Division held that the principal purpose of the Act is to “ensure the availability of a sufficient  number of [ATCs] throughout the State, pursuant to need.” N.J.S.A. 24:6I-7(a).   To that end, the Appellate Division held that the DOH determines need, at least beyond the first six permits dedicated to non-profit entities, through the exercise of its statutorily-vested discretion. N.J.S.A. 24:6I-7(e). In other words, the DOH decides how many ATCs are needed to meet the demand for medicinal marijuana, as well as how the ATC application process is administered. See N.J.S.A. 24:6I-7(b). Based on the foregoing, the Appellate Division concluded that not only must the technical requirements of section 7(e) be met and the information contained in the DOH’s Request for Applications (the public notice for applications) be verified, but there also must be a proven need for the ATC which the applicant is seeking to operate. N.J.S.A. 24:6I-7(e).  The Appellate Division further held that the Act empowers the DOH with discretion to determine the kind and amount of information necessary to process permit applications and to regulate the ATCs. N.J.S.A. 24:6I-7(b) and (i). In this regard, the Act tasks the DOH with the responsibility to “promulgate rules and regulations to effectuate the purpose of this [A]ct, in consultation with the Department of Law and Public Safety.” N.J.S.A. 24:6I-16(a).

With regard to the appellants’ argument that the DOH violated the Act by limiting the amount of ATCs to six non-profit entities – which was the statutory minimum required – the Appellate Division found that the appellants made no showing that DOH’s decision was arbitrary or unreasonable.   The Appellate Division further commented that the Appellants could not make such a showing given that the number of registered qualifying patients in the State was, at least at the time of rejection, unknown.  As a matter of law, in the absence of showing that an agency’s decision was arbitrary and capricious, “a strong presumption of reasonableness” attends an agency’s exercise of its statutorily delegated duties. In re Application of Holy Name Hosp. for a Certificate of Need, 301 N.J. Super. 282, 295 (App.Div.1997). This presumption “is even stronger when the agency has delegated discretion to determine the technical and special procedures to accomplish its task.” Id.  Based on the foregoing, the Appellate Division held that the DOH did not act arbitrarily, unreasonably, or in contravention of the Act, in limiting the initial permitting to the statutorily mandated minimum of six ATCs to cultivate and distribute marijuana.   Thus, the Appellate Division denied the appellants appeal because they did not have an unqualified right to apply for permits to operate ATCs and to have their applications processed and evaluated irrespective of need. As discussed below, the Appellate Division in Caporusso reached the same conclusion with respect to the interpretation of the first sentence in N.J.S.A. 24:6I-7(a).

As demonstrated in Natural Medical Inc., the Court’s role in reviewing administrative decisions is limited. In re Taylor, 158 N.J. 644, 656, 731 A.2d 35 (1999).   An agency’s final decision “will be sustained unless there is a clear showing that it is arbitrary, capricious, or unreasonable, or that it lacks fair support in the record.” In re Herrmann, 192 N.J. 19, 27-28 (2007). That is why Courts defer to the administrative “agency’s expertise and superior knowledge of a particular field.” Id. at 28.    And although not bound by its determination of a purely legal issue, Francois v. Bd. of Trs., Pub. Emps. Ret. Sys., 415 N.J. Super. 335, 348 (App.Div.2010), Courts generally defer to the interpretations of a state agency of the statutes and implementing regulations it administers, unless the interpretation is “plainly unreasonable.” In re Election Law Enforcement Comm’n Advisory Opinion No. 01-2008, 201 N.J. 254, 260 (2010). Judicial deference is particularly appropriate “when the case involves the construction of a new statute by its implementing agency.” In re Freshwater Wetlands Prot. Act Rules, N.J.A.C. 7:7A-1.1 et seq., 238 N.J. Super. 516, 527 (App.Div.1989).

Given the Appellate Division’s holdings in these two cases, there is not viable challenge that could be raised to the statutory interpretation of N.J.S.A. § 24:6I-7(a) that would require the DOH to accept an application to operate an ATC when the DOH has not published notice that it is accepting applications for permits.

  1. Challenging the regulations promulgated by the DOH such as the rule that the DOH shall not consider an application for a permit to operate as an ATC that is not submitted in response to a published notice of request for applications

 

The second option would be to challenge the rules promulgated by the DOH relating to the permit application process.  The Act specifically authorizes the DOH to establish rules and regulations regarding the ATC permit application process and bestows DOH with the discretionary power to require that an applicant provide such information as the DOH determines to be necessary pursuant to regulations that the DOH adopts pursuant to the Act.  For the reasons discussed below, it would be extremely difficult to challenge the rules adopted by DOH.

N.J. Admin. Code § 8:64-6.1 provides that the DOH may periodically request applications for entities seeking authority to apply for a permit to operate an ATC.  The rule further provides that the DOH shall announce a request for applications by publishing a notice in the New Jersey Register.  The rule additionally provides that the DOH “shall not consider an application that is submitted after the due date specified in, or that is not submitted in response to, a published notice of request for applications.”  Thus, unless there is a published request for applications, the DOH is not obligated to consider an application by an entity for a permit to operate an ATC.

It is well settled law that “administrative agencies derive their authority from legislation,” and an agency may not act “to alter . . . [or] to frustrate the legislative purpose.” In re Agric., Aquacultural, & Horticultural Water Usage Certification Rules, 410 N.J. Super. 209, 223 (App.Div.2009) (citations omitted). Article V, section IV, paragraph 6 of the New Jersey Constitution allows the Legislature to review any rule or regulation of an administrative agency to determine whether it is consistent with the intent expressed by the Legislature in the statute. If the Legislature finds the rule or regulation violates the granted authority, it may invalidate or prohibit the adoption of the proposed rule. N.J. Const. art. V, § IV, ¶ 6.

Courts, on the other hand, have “a limited role to play in reviewing the actions of other branches of government” and “can act only in those rare circumstances when it is clear that the agency action is inconsistent with its legislative mandate.” Williams v. Department of Human Services, 116 N.J. 102, 107, 561 A.2d 244 (1989).   Appellate “review of agency regulations begins with a presumption that the regulations are both ‘valid and reasonable.’” New Jersey Ass’n of School Adm’rs v. Schundler, 211 N.J. 535 (2012) (quoting New Jersey Soc. for Prevention of Cruelty to Animals v. New Jersey Dept. of Agriculture, 196 N.J. 366, 385 (2008)). “Such judicial deference to the administrative interpretation of a statute is even more appropriate ‘when the case involves the construction of a new statute by its implementing agency.'” Freshwater Wetlands Prot. Act Rules, 238 N.J. Super. 516, 527 (App.Div.1989) (quoting  New Jersey Guild of Hearing Aid Dispensers v. Long, 75 N.J. 544, 575 (1978)).

Though sometimes phrased in terms of a search for “arbitrary, capricious or unreasonable” action, Campbell v. Dep’t of Civil Serv., 39 N.J. 556, 562 (1963), the judicial role is restricted to three inquiries: (1) whether the agency’s action violated the enabling act’s express or implied legislative policies, (2) whether there was insubstantial evidence in the record to support the findings on which the agency based its actions, and (3) whether in applying the legislative policies to the facts, the agency clearly erred by reaching a conclusion that could not reasonably have been made after weighing the relative factors.  Accordingly in its review of challenges to an agency’s exercise of authority, the Court “may not substitute [its] judgment for the expertise of an agency ‘so long as that action is statutorily authorized and not otherwise defective[.]'” Williams, supra, 116 N.J. at 107 (quoting Dougherty v. Department of Human Services, Div. of Medical Assistance & Health Services, 91 N.J. 1, 12 (1982)).   Finally, the New Jersey Supreme Court has advised the judiciary that “‘an ultra vires finding is disfavored.'” Freshwater Wetlands Prot. Act Rules, supra, 238 N.J. Super. at 525 (quoting New Jersey Guild of Hearing Aid Dispensers, supra, 75 N.J. at 561). And, any party challenging a regulation must prove its invalidity. New Jersey State League of Municipalities v. Department of Community Affairs, 158 N.J. 211, 222 (1999).

The Division of Administrative Rules within the Office of Administrative Law reviews all State Executive Branch rule making notices for compliance with the Administrative Procedure Act, N.J.S.A. 52:14B-1 et seq., and the Office’s Rules for Agency Rule making, N.J.A.C. 1:30. These notices are then processed by the Division for publication in the New Jersey Register, published twice a month.   Following publication of adopted rules in the New Jersey Register, the rules are incorporated into the New Jersey Administrative Code.  In New Jersey, State agencies must follow certain procedures when creating new rules.  As noted above, this includes publication of a notice of proposed rule making in the New Jersey Register.  After publishing this notice, the agency must accept comments from the public regarding the proposed rule. This gives interested parties and the general public the opportunity to weigh in on the rule, including the reasons for opposing the rule in its entirety or criticizing specific aspects of the rule.  Agencies are required to respond to all public comments to a reasonable extent, and sufficient public opposition to or criticism of a proposed rule may result in modifications to the rule or, in cases of significant opposition, re-drafting of the rule with a new publication and comment period.

The process described above is known as informal rule making.  In some situations, the statute empowering the agency requires more formal rule making procedures that involve a public hearing, at which interested parties may intervene and present arguments and evidence.  An administrative law judge (“ALJ”) usually presides over the hearing, and the ALJ’s ruling constitutes the new rule.  The Act does not provide for formal rule making so the DOH’s rules are not subject to a hearing before an ALJ.

Once an agency has completed the required steps in the rule making process, it publishes a notice of final rule in the Register and codifies the new rule in the New Jersey Administrative Code.  At this stage, interested parties can challenge a new regulation in court with several possible arguments, depending on the circumstances: (1) the agency failed to follow the procedures outlined by the Office of Administrative Law, rendering the new rule invalid; (2) the new rule exceeds the authority granted to the agency by the State Legislature; or (3) the new rule violates some other constitutional or statutory right of the plaintiff.   With respect to the hypothetical above, none of these arguments would hold any water in Court.

First, the DOH followed the correct procedures in publishing notice about its proposed rules and responding to the public’s comments about them.  The proposed rules and final rules are published on the DOH’s website at http://www.nj.gov/health/medicalmarijuana/program-rules/.  Second, the permit rules promulgated by the DOH do not exceed the authority granted to the agency by the State Legislature.  Lastly, it would be a stretch to argue that these rules somehow violate a constitutional or statutory right.  The fact that the DOH controls the permit application process does not give rise to any obvious due process or equal protection claims.  For this reason, unless a challenger to these rules had proof that the DOH is enacting procedures to effectively stifle the implementation of the Act, there is no viable legal argument that could be raised to challenge the DOH’s rules.  Moreover, the fact that the Legislature did not exercise a legislative veto of the DOH’s regulations would require the Court to afford deference to these regulations.  Cnty. of Hudson v. State, Dep’t of Law & Pub. Safety, 328 N.J. Super. 308, 321 (App.Div.2000).

For the reasons just discussed, the Appellate Division in Caporusso held that the Appellants’ challenge to the DOH’s rules with respect to the required THC content in medical marijuana sold in New Jersey had no merit.   It bears mentioning that during the commenting period for the DOH’s proposed rules, members of the public argued that the DOH’s regulations have created a monopoly by only allowing 6 ATCs to operate in the New Jersey, which in turn, has resulted in patients being charged excessive prices for their antidepressants medicine.  The DOH rejected these comments in its final rules and in the subsequent reports that it filed with the State.    Based on the foregoing, it would be extremely difficult to amount a successful challenge to the DOH’s permit rules.

  1. Challenging the DOH’s findings in its 2015 Biennial Report regarding the need for more ATCs and the reasonableness of the prices charged by the current ATCs

 

Lastly, one could challenge the DOH’s 2015 findings regarding the need for more ATCs and the reasonableness of the prices charged by the current ATCs.   Of all the options, this is the most difficult to do without concrete proof that the DOH’s findings are not based on facts in the record.

The Act directs the DOH to ensure the availability of a sufficient number of ATCs throughout the State pursuant to need.  N.J.S.A. 24:6I-7(a).  The Act further requires within two years after the effective date of the statute and every two years thereafter, the DOH to evaluate: (1) whether there are sufficient numbers of ATCs to meet the needs of registered qualifying patients through the State; (2) whether the maximum amount of medical marijuana allowed pursuant to the Act is sufficient to meet the medical needs of qualifying patients; and (3) determine whether any alternative treatment center has charged excessive prices for marijuana that the center dispensed.

In accordance with  the Act, the DOH published its 2015 Biennial Report in March 2016 to address, in part, (1) whether there are sufficient numbers of ATCs to meet the needs of registered qualifying patients through the State; and (2) whether any alternative treatment center has charged excessive prices for marijuana that the center dispensed.  Based on its investigation, the DOH concluded as follows:

  1.   The present number of ATCs is capable of meeting the current registered qualifying patient needs. The DOH does not at this time recommend additional ATCs beyond the six identified in the initial selection process.
  1. Based upon cost of living variations, the price of New Jersey medicinal marijuana is comparable with the price in states with similar regulatory models. The price of New Jersey medicinal marijuana is within five and sixteen percent of New Jersey black market marijuana. New Jersey medicinal marijuana is regulated and tested, patients are afforded protection under the Act and are able to change ATC affiliation at any time at no cost. ATCs are required to pay federal corporate tax at a rate of 34 percent. Given those considerations, as well as the regulatory oversight and patient protections built into the program, the Department determines that no ATCs are charging excessive prices for medicinal marijuana.

 

Anyone seeking to challenge the DOH’s findings would face an extremely uphill battle unless they could clearly and convincingly show that DOH’s decision to not recommend additional ATC’s beyond the six already approved was unsupported by substantial credible evidence in the record and not accompanied by a reasonable explanation.  When an agency’s inaction is unsupported by substantial credible evidence in the record or accompanied by no reasonable explanation, a Court may conclude an agency’s inaction is arbitrary, capricious, and unreasonable. Gilliland v. Bd. of Review, Dept. of Labor & Indus., 298 N.J. Super. 349, 354-55 (App.Div.1997) (deeming agency action arbitrary and capricious where no explanation is provided to support it).   In those circumstances, the Court may compel the agency to take certain action.  The New Jersey’s Legislature’s desire to assure progress of Act is expressed under the statute, which directs the DOH “shall report to the Governor and the Legislature . . . no later than one year after the effective date of this act, on the actions taken to implement the provisions of this act[,]” and annually thereafter. N.J.S.A. 24:6I-12(a)(1), (2). The DOH also must report findings regarding the sufficiency of the number of ATCs and other issues within two years of the effective date and every two years thereafter. N.J.S.A. 24:6I-12(c).

As noted above, the Court may not substitute its judgment for the expertise of an agency when the action being reviewed is statutorily authorized and not otherwise defective.   For this reason, the Court’s authority to compel agency action is exercised sparingly, as Courts are ill-equipped to micromanage an agency’s activities. Sod Farm Assocs. v. Twp. of Springfield, 366 N.J. Super. 116, 130 n.10 (App.Div.2004). Rather, Court’s accord wide discretion to administrative agencies which are to decide “how best to approach legislatively assigned administrative tasks.” In re Failure by the Dep’t of Bank. & Ins., 336 N.J. Super. 253, 262 (App.Div.), certif. denied, 168 N.J. 292 (2001).).  For this reason, an individual’s challenge to the inaction of a State agency can seek to compel only clearly “mandated ministerial obligations,” which do not require an evaluative judgment in the exercise of discretion. Equitable Life Mortg. & Realty Investors v. New Jersey Div. of Taxation, 151 N.J. Super. 232, 238 (App.Div.), certif. denied, 75 N.J. 535, (1977).

For example, the DOH’s obligation to timely report to the State Legislature its findings regarding whether to increase the amount of ATCs in the State would be considered a ministerial obligation, and thus, could be compelled by what’s called a writ of mandamus.   The DOH’s decision whether or not to increase the amount of ATCs in the State would not be considered ministerial, and thus, is next to impossible to challenge unless it was so obvious that the DOH’s findings are not based on facts in the record and are merely made to frustrate the purpose of the Act.

In Caporusso, the Appellate Division held that a decision approving an ATC’s operations involves a policy judgment by the DOH. See In re Petition of Howell Twp., Monmouth Cnty., 371 N.J. Super. 167, 188 (App.Div.2004) (stating the court shall not “compel a specific form of agency  action” but may order “a remedy for arbitrary inaction”). Accordingly, the Appellate Division held that it could not compel the DOH to exercise its discretion in a specific manner with respect to the discretionary agency review granted by the Act.

Based on the foregoing, it would be extremely difficult to mount a successful challenge to the DOH’s findings in its 2015 Report regarding that there is no need for more than 6 ATCs in New Jersey.  Those seeking to apply for a permit to operate an ATC will need to wait until the DOH issues its bi-annual report in 2018 to see whether the DOH finds that there is a need for more ATCs in New Jersey.

 

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Eric’s varied litigation and transactional experience includes complex commercial/ chancery/federal matters, preliminary injunctions, partnership/corporate shareholder actions, will & probate litigation, guardianships, bankruptcy, bankruptcy court litigation and corporate dissolutions, business transactions & corporate law, asset recovery/repo, debt collection & judgment enforcement, receiverships, foreclosure, fraudulent transfer litigation, attorney & professional ethics, entertainment and intellectual property, internet and website development law, real estate disputes and restrictive covenants, trial & appellate practice in state and federal courts. Eric has also been appointed by the court to serve as counsel to an alleged incapacitated person in a guardianship matter and is a candidate for judicial appointments in complex commercial litigation matters as a special fiscal agent, receiver and provisional director.

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