The City of Bellevue’s (WA) first-in-time rule to decide between competing applications for retail cannabis establishments within 1,000 feet of each other created a confusing process when first implemented in 2014 and now has led to the City’s exposure for tortious interference with business expectancy damages by a license applicant who lost out. In a March 4, 2019 published decision in Greensun Group, LLC v. City of Bellevue, Division One of the Washington Court of Appeals ruled that a trial is warranted on Greensun’s claim that the City’s denial of a recreational cannabis license improperly interfered with Greensun’s plan to open a store in downtown Bellevue.

Few would argue that uncertainty and confusion accompanied the development and rollouts of recreational cannabis regulations by the State Liquor and Cannabis Board (LCB) and local jurisdictions. The licensing process in Bellevue probably was more fraught than others due to the large number of qualified applicants, the limited number of licenses available, and restrictions on areas for operation. At issue in Greensun was which applicant got their LCB license first because the City would use that to preclude licenses for other retail cannabis shops that might be located within 1,000 feet of that applicant.

Greensun planned to open a recreational cannabis shop in downtown Bellevue at 106th and Main Street, and started the city permit process 18 months earlier when it sought to open a medical marijuana shop there. Undaunted by the City’s initial denial of the medical marijuana license, Greensun extended its lease, made improvements to the property, and applied to the LCB for a recreational cannabis license. Things got complicated for everyone after the LCB listed Greensun and 18 other applicants as qualified for Bellevue, but only allocated four retail licenses to the city. LCB held a lottery to sort out who got the licenses. Greensun initially was fifth in the lottery, but expected one of the four selectees to be disqualified due to application errors.

The City, meanwhile, had adopted an ordinance that extended interim zoning controls for retail cannabis shops and imposed the 1,000-foot separation rule. The City said if two or more applicants would be located within 1,000 feet of each other, it would apply a “first-in-time” rule to the entity that LCB licensed first. Greensun applied for a business license expecting the disqualification of one of the other lottery selectees. The City, however, denied the application because Greensun was not one of the four lottery winners.

Another of the lottery selectees submitted its application for a license to the City for a location in the same block as Greensun’s anticipated store. That applicant received LCB’s conditional approval on July 7, which was part of a batch of LCB license approvals issued that day. Greensun was not part of that initial batch of approvals, but later the same day received a conditional approval letter after the disqualification of an applicant.

Late in the afternoon of July 7, the City advised that Greensun was not “first-in-time” and could not open a retail store at the planned location in downtown Bellevue. After the LCB said it had no way to determine which applicant it had licensed first, the City asked the two competing licensees for information about which one LCB licensed first. Following submissions by both applicants, the City informed Greensun that it was not first in time. Greensun sued the City for violation of due process and the privileges and immunities clause of the Washington State Constitution, seeking declaratory and injunctive relief, claiming it would have been able to open its retail store in less than two weeks after LCB’s issuance of licenses if the City had issued the requested business license.

The trial court granted summary judgment dismissing Greensun’s claims on the grounds the City’s actions were not arbitrary and capricious. In June 2016, Division One reversed the trial court and invalidated the first-in-time rule. Greensun amended its complaint to add a claim for money damages caused by the City’s interference with its business expectancies. On cross motions for summary judgment, the trial court granted the City’s and denied Greensun’s. The March 4, 2019 decision by Division One reversed the City’s summary judgment.

The court’s ruling reviewed the five elements of tortious interference with a business expectancy and found that Greensun had alleged facts establishing all five elements. The court ruled Greensun had a valid business expectancy to open a retail cannabis store; the City knew of that expectancy; it intentionally interfered; by improper means through the regulatory course changes and definitions in the midst of the process; and caused resultant damage to Greensun, for example, the other applicant’s store in Bellevue generated $300,000 gross sales in its first month.

The court also said there were issues of fact regarding the City’s defenses of good faith interpretation of the zoning ordinance because the use of the timing of LCB licensing to determine “first-in-time” was questionable and changing. In fact, the other applicant complained to the City about its “illogical first-in-time rule.” Nor were the City’s actions necessarily protected by its discretionary immunity because a city is not protected from liability for arbitrary and capricious acts. Accordingly, the court of appeals remanded the case for trial.

Division One’s decision may not be the last word on this case. Because of the potential to open cities to greater liability for zoning and licensing decisions, the City certainly can ask the State Supreme Court to take the case, and the City likely would have strong support from other cities and local governments. If the Supreme Court declines to take the case, it would go to trial and, whatever the outcome, probably be subject to a third appeal. In the meantime, Greensun is a cautionary tale about what can happen with the implementation of a new and complicated regulatory scheme and raises the stakes for cities in all types of zoning and licensing decisions, not just those related to cannabis.