E-commerce company challenges state pot restriction

E-commerce company Leafly has carved out a niche as one of the nation’s leading shopping sites for all things cannabis.

Leafly and similar websites allow visitors to peruse the stock available at medical marijuana dispensaries, place orders online and pick up and pay for the goods at local storefronts.

But Florida health regulators this year stopped medical marijuana operators from using Leafly and other third-party sites to process patient pre-orders, saying the services violate a state law banning operators from contracting for services “directly related to the cultivation, processing and dispensing” of cannabis.

The Seattle-based Leafly Holdings, however, disputes that it is engaging in activity related to the dispensing of cannabis products and last week filed a legal challenge. The company’s petition asks an administrative law judge to find that the Florida Department of Health employed an “unadopted and invalid rule” to conclude that the online services violate the law.

Until February, many of the state’s licensed medical marijuana operators relied on Leafly and another well-known e-commerce cannabis company — I Heart Jane — to help provide online shopping services for Florida patients.

The companies’ websites allowed customers to browse inventory at dispensaries, place items in online shopping carts and submit orders. The companies would send the information to medical marijuana operators, which would fulfill the orders and contact the e-commerce vendors when orders were complete. Patients would have to pick up and pay for their purchases in person.

But most — if not all — Florida marijuana operators canceled contracts with the e-commerce companies after receiving a Feb. 1 memo from the Department of Health threatening to impose fines on those who continued to rely on the pre-order services.

The state Office of Medical Marijuana Use “has received inquiries and complaints regarding qualified patients and caregivers placing orders for the dispensation of marijuana and low-THC cannabis through Leafly,” then-Department of Health Chief of Staff Courtney Coppola wrote in the February memo.

Medical marijuana operators are barred by law from contracting for services “directly related to the dispensing of marijuana or marijuana delivery devices,” Coppola, now a deputy chief of staff for Gov. Ron DeSantis, wrote.

“Contracting with Leafly.com, or any other third-party website, for services directly related to dispensing is a violation of this provision,” she wrote. Operators that continued using the services might be subject to maximum fines of up to $5,000 per violation, Coppola warned.

But Leafly argued that it doesn’t dispense products.

“Leafly does not prepare, possess, purchase, transmit, distribute, sell or dispense any medical marijuana in Florida or elsewhere,” Seann Frazier, a lawyer representing Leafly, wrote in the legal challenge.

The e-commerce company “is not involved in the purchase, sale or storage of marijuana,” Frazier argued.

“Leafly does not, and has never, dispensed medical marijuana to any qualified patient in Florida, and Leafly has never provided services directly related to the cultivation, processing, or dispensing of marijuana or marijuana delivery devices in Florida,” he said.

The health department’s “newly announced policy … effectively bans Leafly from conducting business in Florida,” Frazier added.

The Department of Health on Monday filed a motion to dismiss the petition, but the motion was not available for viewing on the Division of Administrative Hearings website. The health department asked Administrative Law Judge Suzanne Van Wyk to determine whether an attachment to the motion should remain off-limits to the public because it contains trade secrets. The agency also on Monday asked Van Wyk to issue a protective order to keep Leafly from obtaining certain documents.

The state argued that Florida law requires the health department to protect the confidentiality of patients and to ensure that medical marijuana operators also protect patients’ confidential and personal information.

“Thus, sharing of patient information, including names, dates of birth, and identification numbers with unauthorized individuals (including Leafly) and outside of the Medical Marijuana Use Registry violates Florida law,” Department of Health General Counsel Louise Wilhite-St Laurent wrote.

The health department also argued that, because it doesn’t regulate Leafly, the company doesn’t have standing to challenge the policy. Van Wyk is slated to hold a hearing in the case next month.

According to its website, Leafly has more than 10 million “active monthly users” and more than 4,600 retailers throughout the country. The site can be used to compare dispensaries’ prices, show product availability and read or post reviews.

Such e-commerce companies offer a less expensive way for cannabis operators, known in Florida as medical marijuana treatment centers or MMTCs, to market their products and reach consumers than hosting their own platforms, industry insiders contend.

“Patients want to use these sites because they provide a way to easily navigate between the medical marijuana products available on the market, to more easily compare products offered by multiple MMTCs and to identify products more easily that they enjoy or that have been advocated for them in the past,” Tallahassee attorney Devon Nunnelley, whose clients include several Florida medical marijuana operators, told The News Service of Florida in a phone interview.

But the use of the e-commerce companies could run afoul of the state’s regulatory structure for the medical marijuana industry, which requires operators to cultivate, process and dispense cannabis and derivative products. Lawmakers included the requirement, known as “vertical integration,” when they first laid out a framework for the cannabis industry in 2014 before voters two years later passed a constitutional amendment that broadly legalized medical marijuana.

“From the start of this in 2014, everyone knew that it would take creativity — in business models, in corporate structure, etc. — to operate a successful business under this statutory regulatory structure. Whether this case was intended to or not, it appears to be one of the first attempts to use that creativity to chip away at vertical integration by peeling off what has always been thought of as a dispensing function,” Patty Nelson, a former director of the state Office of Medical Marijuana Use, told the News Service.

The vertical integration requirement since its inception has been a contentious issue, with many critics maintaining the system drives up the cost of doing business in Florida and makes it more difficult for smaller operators to vie against competitors with more assets.

Leafly’s website, meanwhile, continues to feature cannabis products available at many Florida dispensaries, but patients no longer are able to use the site to place orders online.