Illinois Supreme Court to decide fate of last contested medical marijuana growing license in the state

A five-year court case soon to be brought before the Illinois Supreme Court will determine if a coveted cannabis growing license should continue to be held by the company already using it in Aurora, or potentially go to a rival that wants to set up shop in Zion.

The case pits Curative Health Cultivation, LLC in Aurora, against Medponics Illinois LLC, which filed suit and won an initial court ruling that Curative should be stripped of its license. An appellate court reversed that ruling, and now the state’s highest court will rule on a license that’s likely worth millions of dollars.

A hearing is expected to take place early next year. The license at stake is worth far more than any of the new permits that Illinois plans to issue, analysts say. Because the medical license later qualified Curative to grow recreational marijuana, the Curative permit is the last one to be contested that allows growing huge amounts of cannabis for both markets.

One company in the dispute appears to have a significant advantage in terms of size and experience in the industry. New York-based Columbia Care, which acquired Curative Health after it won the license, is one of the largest cannabis operators in the world, with 100 facilities in 18 jurisdictions in the United States and Europe, including dispensaries in Chicago’s Jefferson Park community and west suburban Villa Park.

Columbia Care officials declined to comment on the suit, but previously said they planned to start supplying product just this year, years later than their competitors.

Columbia Care’s co-founders and partners are director Michael Abbott and CEO Nicholas Vita, both former executives at New York investment firm Goldman Sachs. Columbia Care reported a company record with $54 million in revenue in the third quarter of this year, with a 39% gross profit margin.

The company declined to comment on the suit, but it also has the office of Attorney General Kwame Raoul on its side, defending the Illinois Department of Agriculture’s handling of the matter.

In contrast, Medponics is an upstart challenger, trying to get is first and only cannabis license to open a Dutch-style hydroponics greenhouse in Zion. The company also has the backing of Zion’s mayor, who is hoping taxes generated by the license would help improve the city’s dire finances and make up for revenue lost since its nuclear power plant closed in 1998.

Its principal owners are businessmen James Merlo, of Wadsworth, and James Herchenbach, of Libertyville. The two men said they met with state lawmakers as far back as 2012 in talks that led to the state law allowing medical marijuana.

Merlo recently moved his logistics business, Trifinity Specialized Distribution, from Waukegan to Kenosha, Wisconsin, saying he was fed up with Illinois. Herchenbach also plans to open a hydroponics greenhouse for produce in Pleasant Prairie, Wisconsin. But both men still want the last full-size cannabis license that’s being contested in Illinois.

In an interview with the Tribune, Medponics President Keith Malone highlighted the company’s plans to use hydroponics technology to grow cannabis, and said his company should get the license if Curative loses it, because Medponics was the only company to challenge the awarding of the license within months of its issuance in 2015.

“We’ve consulted our attorneys, we’ve also consulted other legal scholars ... and they tell us under the case law that we have an excellent chance of appeal,” Malone said.

But if the Supreme Court rules against Curative, it still likely will be up to the state to decide if Medponics or another company will get the license.

The license being disputed is to grow and sell medical cannabis. But every medical license holder in Illinois, including Curative Health, also became licensed to sell recreational marijuana to the public starting this year.

Because Illinois has restricted licensing to only 21 growers, analysts say its licenses are worth far more than in other states, such as Colorado or Oregon, where there are hundreds of licensed growers and licenses are offered for a couple of million dollars. The licenses are also expected to be worth far more than 40 new craft grower licenses the state plans to issue, which are limited to 5,000 square feet of growing space, compared with 210,000 square feet for the Curative site.

The value of cannabis grow licenses can vary greatly. One small Illinois operation is to be sold for about $32 million in a recently announced deal. But with total Illinois retail cannabis sales expected to clear $1 billion this year, a large-scale operation could be worth closer to $100 million, estimated financial analyst Matt Karnes, founder of Greenwave Advisors in New York City.

The state agriculture agency first issued medical cannabis licenses in 2015. But then-Republican Gov. Bruce Rauner’s administration said that the application scoring process that had taken place during the administration of Democratic Gov. Pat Quinn was flawed and could result in extensive litigation. A list of scores showed that Curative Health had the high score in its district but was marked as “DQ,” which Medponics officials understood to mean disqualified.

Several lawsuits were filed challenging the state’s awarding of cannabis licenses and generally were dismissed or settled. But Medponics sued the state and Curative Health over its license, and won the first legal round in 2017.

Judge Michael Fusz overturned the awarding of the license to Curative Health. He maintained that the Aurora cultivation center was located too close to an area zoned exclusively for residential purposes, even though other uses were allowed, putting the facility in violation of state law.

Curative and the agriculture department’s position was “illogical and does not fit the plain meaning of the statute,” the judge ruled.

“The award of the license to Curative is therefore clearly erroneous; the Court has the definite and firm conviction that a mistake has been made,” the judge wrote.

However, the judge added, the license should not necessarily go to Medponics. The rules state that in case a company forfeits the permit, it shall be awarded to the next highest-scoring applicants. Medponics scored fifth-highest. The judge did not order the Department of Agriculture to award the license to anyone, but ruled that the agency should reevaluate and rescore all the applicants to determine which qualified applicant falls outside of the 2,500-foot setback.

Curative Health appealed the initial court ruling. Before the appeal was resolved, in October 2019, Curative Health was among the first in the state awarded a license to also grow recreational marijuana. This prompted the city of Zion, which is counting on Medponics to bring in much-needed cash to the city, to issue a cease-and-desist letter demanding Columbia Care, Curative’s owner, stop producing marijuana for recreational sale.

At the time, Department of Agriculture spokeswoman Krista Lisser said a stay was put on the 2017 ruling pending the outcome of Columbia Care’s appeal, meaning the company’s medical growing permit was effectively active at that time and the company met that requirement for a recreational license.

Days later, the appeals court partially overturned the lower court’s ruling, saying that although the facility was within 2,500 feet of a residential area, it was not an “exclusively” residential area, because it allowed numerous other uses such as transportation and utility services, golf courses, day cares or hospitals. The appellate court cited rules and an online explanation from the Department of Agriculture that defined the zoning rule to mean “exclusively residential.”

While the ruling did not set legal precedent, it suggests that a medical cannabis cultivator in Illinois could be located near any residential area that also allowed other uses — though the law states plainly that a cultivation center may not be near “an area zoned for residential use.” In general, the courts give deference to state agencies that set rules interpreting such laws.

Aurora officials generally have sided with Columbia Care. City spokesman Clayton Muhammad issued a statement that city officials believe the appellate court was right to reinstate the license, and said they were “cautiously optimistic” the Supreme Court will affirm the license.

But Medponics got some high-powered legal backup for its side. In February 2015, DuPage County State’s Attorney Robert Berlin wrote a letter asking the Department of Agriculture to deny the requested license for the site.

Berlin wrote that the site was within 2,500 feet of a residential zone, putting it too closes to homes, schools and day cares, in contravention of state law, and endangering the “morals and welfare” of children in the nearby Stonebridge subdivision.

The city of Zion has a stake in Medponics winning as well.

The northern suburb has a deal to lease land for Medponics’ cultivation center for 3% of the company’s gross revenue. City administrator David Knabel estimates that would generate about $1.5 million in new revenue for the city, filling most of its anticipated deficit.

“This is just the right thing to do, is to award the license to them,” Knabel said.