Shelton v. Liquor & Cannabis Bd.

JAMES K. SHELTON, BEN SHELTON III, and SAMI SAAD, Plaintiffs, v. LIQUOR AND CANNABIS BOARD OF THE STATE OF WASHINGTON, et al., Defendants.

No. C22-5135 BHS

United States District Court, W.D. Washington, Tacoma

July 8, 2022

ORDER

BENJAMIN H. SETTLE UNITED STATES DISTRICT JUDGE

Plaintiffs Sami Saad, Ben Shelton III, and James K. Shelton assert that Defendants Rick Garza, Steve Hobbs, Washington Liquor and Cannabis Board (“LCB”), and City of Seattle (“City”) deprived them of their ability to participate in Washington's legal cannabis market after Washington combined its medicinal and recreational markets. Plaintiffs owned medicinal cannabis stores in Washington prior to the consolidation. They did not seek licenses under the new scheme, allegedly because LCB agents, acting as peace officers, threatened them to leave their businesses. Plaintiffs are Black, and they allege that the majority (or “all”) of the remaining cannabis store owners in Seattle are white.^[1] They therefore assert that Defendants violated their constitutional and statutory rights by denying their participation in the consolidated cannabis market in Washington. Defendants move to dismiss all claims against them.

I. BACKGROUND

A. History of Washington Cannabis Law

Before Washington became one of the first states to legalize recreational cannabis in 2012, Washington legalized cannabis for medicinal purposes in 1998. The ballot initiative that legalized medical cannabis, Initiative 692, did not legalize dispensaries, however. Nine years later, Senate Bill 6032 altered the law, allowing a “designated provider,” rather than a “primary caregiver,” to supply a patient with medical cannabis. Under SB 6032:

“Designated provider” means a person who:

(a) Is eighteen years of age or older;

(b) Has been designated in writing by a patient to serve as a designated provider under this chapter;

(c) Is prohibited from consuming marijuana obtained for the personal, medical use of the patient for whom the individual is acting as designated provider; and

(d) Is the designated provider to only one patient at any time.

While SB 6032 did not legalize dispensaries, it created a legal loophole and dispensaries began operating as purported “designated providers.” While it remains unclear whether dispensaries would have actually qualified under the definition, the State largely ignored the operations.

The Washington legislature attempted to regulate medical cannabis dispensaries in 2011 with Senate Bill 5073. Although the bill passed in both the House and Senate, the Governor vetoed the parts of the bill that would have implemented registration and licensing requirements, raising her concern that such a regulatory regime would make state regulatory employees vulnerable to federal prosecution. The partial veto left dispensaries in the same place they had been previously: operating in a legal gray area without licensing and registration requirements.

In 2012, Washington became one of the first two states to legalize recreational cannabis with Initiative 502. Unlike the medical cannabis market, recreational cannabis was governed by an extensive regulatory and licensing regime from the point of legalization. Washington established the LCB, which was responsible for tracking, licensing, and regulating recreational cannabis businesses. The first recreational cannabis stores in Washington opened in 2014.

In 2016, Washington enacted Senate Bill 5052, which consolidated the previously unregulated medical and regulated recreational cannabis markets and placed both markets under LCB regulation. This meant that, for the first time, one needed an LCB-issued license to sell medical cannabis. All unlicensed medical dispensaries were required to close by July 2016. The bill also eliminated community gardens, but allowed very limited “cooperative gardens.” Those with experience in the industry were supposed to have been given priority when applying for an LCB license. However, there were only a limited ORDER number of licenses available, which did not cover the large number of shuttered dispensaries.^[2]

B. Facts and Procedural History

Plaintiffs James K. Shelton, Ben Shelton III, and Sami Saad were all participants in the medical cannabis market. Saad owned and operated the medical dispensary “12 Green LLC” located near the Greenwood neighborhood in Seattle, at 323 North 105th Street. Dkt. 1-1, ¶ 1. Saad alleges that LCB agents pressured him out of business by posing as peace officers and telling him: “You guys aren't going to get your (City) business licenses renewed.” Id. ¶ 4. Saad interpreted that statement to mean that Black medical cannabis business owners would not receive LCB approval to operate cannabis businesses. Id. ¶ 6. It is not clear from the face of the complaint when Saad closed his dispensary, but there is no suggestion that he continued to operate without an LCB license after June 2016.

The Sheltons owned and operated the medical dispensary “Lifetree Inc.” in unincorporated King County, at 12409 Renton Avenue South. Dkt. 1-1, ¶ 10. The Sheltons converted that dispensary into a community garden in 2016. Id. ¶ 11. Similar to Saad, the Sheltons allege that LCB agents pressured them out of business by visiting their place of business posed as peace officers and telling them that they had to cease operations. Id. ¶ 12. The Sheltons closed their business on or around June 20, 2016 after receiving a cease-and-desist letter from LCB. Id. ¶ 13.

In February 2022, Plaintiffs sued LCB, Director of LCB Rick Garza, the City of Seattle, and Washington Secretary of State Steve Hobbs in Thurston County Superior Court. Dkt. 1-1. The complaint asserted ten causes of action: (1) Declaratory Judgment; (2) Tortious Interference; (3) Leading Organized Crime; (4) Criminal Impersonation in the First Degree; (5) Criminal Impersonation in the Second Degree; (6) Unconstitutional Fifth Amendment Taking; (7) 42 U.S.C. § 1981 Right to Contract; (8) 42 U.S.C. § 1983 Constitutional Deprivation Under Color of Law; (9) 42 U.S.C. § 1985 Conspiratorial Alliance; and (10) Unconstitutional Fifth Amendment Taking. Id. ¶¶ 25-37. Plaintiffs sought declaratory judgments that Plaintiffs were not required to surrender their licenses prior to July 2022. Id. at 15. They also sought a declaratory judgment that they were subject to unlawful tortious interference, a declaratory judgment that they were subject to unlawful criminal racketeering, injunctive relief, compensatory damages, net profits from 2016 to now, treble damages, and costs. Id.

The City removed the case to this Court. Dkt. 1. Shortly after removal, all four defendants moved to dismiss the case in two motions: one filed by the City, Dkt. 7, and one filed by the three other defendants (“State Defendants”), Dkt. 6. All Defendants assert many of the same arguments for dismissal, including that all of Plaintiffs' civil claims are barred by the limitations period and that the three criminal claims are barred because they do not have a civil cause of action. The motions also assert that Plaintiffs' claims do not meet the minimum pleading standards. Garza, who was sued in both his individual and official capacities, also argues he is entitled to qualified immunity. Dkt. 6 at 15-16.

Plaintiffs filed a joint response to the two motions to dismiss, arguing, among other things, that the discovery rule should apply to extend the accrual date of the limitations period. Dkt. 13. They also submitted various exhibits with their response to support their assertion that the LCB's licensing regime is racist and has had a disparate impact. Id.^[3] Defendants also move to stay discovery pending the resolution of the instant dispositive motions, Dkt. 25, and Plaintiffs oppose that request,^[4] Dkt. 27.

II. DISCUSSION

It is worth noting at the outset that Plaintiffs seem to primarily take issue with the manner in which the medical cannabis market was folded into the recreational market and placed under LCB's control. While it is possible that the State's consolidation of the cannabis market was flawed, that does not necessarily indicate a violation of Plaintiffs' rights. Moreover, Plaintiffs do not challenge the regulatory scheme as a whole through something like an Equal Protection Clause lawsuit.^[5] Rather, they raise various causes of action in an attempt to argue that Defendants conducted and participated in a grand conspiracy to deprive them of licenses to sell cannabis. Plaintiffs' claims are implausible as pled, exceed the limitations period, and otherwise fail for reasons explained below.

A. Motion to Dismiss Standard

Dismissal under Federal Rule of Civil Procedure 12(b)(6) may be based on either the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory. Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1988). A plaintiff's complaint must allege facts to state a claim for relief that is plausible on its face. See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). A claim has “facial plausibility” when the party seeking relief “pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id.

Although the Court must accept as true the complaint's well-pled facts, conclusory allegations of law and unwarranted inferences will not defeat an otherwise proper Rule 12(b)(6) motion to dismiss. Vazquez v. Los Angeles Cnty., 487 F.3d 1246, 1249 (9th Cir. 2007); Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001). “[A] plaintiff's obligation to provide the ‘grounds' of his ‘entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action...