Seed-to-sale: What is going on?
Over the past month, quick headlines have caused quick confusion in the medical marijuana industry about Missouri’s medical marijuana seed-to-sale contract award, protest, and denial.
The bulk of the current confusion comes from a seemingly contradictory, but immediately irrelevant, rule included in the finalized rules that the Department of Health and Senior services has delivered to the Secretary of State’s Office for printing, along with the announcement of another public comment period.
WHAT’S NEXT FOR THE PROGRAM RULES?
The Department of Health and Senior Services released its finalized rules on May 24, ahead of schedule, with an emergency clause. Emergency rules – allowed by Article XIV – take effect June 3, 2019.
The rules will be entered into the Missouri Register, published by the Office of the Secretary of State.
The rules lastly go before the Joint Committee on Administrative Rules, a joint group of legislators from both the state senate and house that provide oversight to executive departments on internal rulemakings.
Rule changes can be proposed by the Department at any time. Changes go through the Secretary of State and legislature again.
The emergency rules, which were submitted to the Secretary of State for publication in the Missouri Register on May 24, are set to be printed on June 17, 2019. They will then be printed in the Code of State Regulations on June 30, 2019, and become effective July 30, 2019.
In those rules, is a provision. A provision being amplified by mainstream media as “another” bump in the road for the medical marijuana division of DHSS.
Unless otherwise addressed or prohibited by contract or law, an entity holding a contract with the state of Missouri for a statewide track and trace system and any affiliates of that entity may charge a price to a licensed or certified facility for plant/product tracking labels, but no such price shall exceed the cost of producing the label in an amount that would create more than thirty (30) percent net profit on each label.
That provision has led to a losing bidder of a contract offered by the State for information solutions – computer programs, including seed-to-sale – to contact the Secretary of State asking them to not print the rules, advertently causing the rulemaking process to halt.
A representative from DHSS said that “the 30% rule is meant to protect the industry as a price cap in the event a vendor for the statewide track and trace system is someday allowed to charge for plant tags.”
“DHSS has introduced substantial uncertainty by issuing an emergency rule that appears to permit Metrc to do exactly what OA said it could not,” Chuck Hatfield wrote on behalf of seed-to-sale programmer BioTrackTHC in a letter to the office of Secretary of State Jay Ashcroft.
A representative from the Secretary of State’s office said they are still reviewing the emergency rule along with the Hatfield letter. The rule was filed on May 24, and may not be published until 10 days have passed.
THE BACKSTORY
Amendment 2, passed in November 2018, specifies that DHSS “shall certify, if possible, at least two commercially available systems to licensees as compliant with its tracking standards and issue standards for the creation or use of other systems by licensees.”
The possibility for two systems is currently very low, with industry thought leaders sharing that two can’t share the same database because they have their own structure. In order to meet some of the requirements to keep people from looping, such as real-time updates on purchases and checking amount purchased per month, it made it impossible to have more than one and still meet the timelines set in the amendment. Choosing one system limited the potential for system abuse.
Licensees include cultivators, manufacturers, and dispensaries of medical marijuana. Those required to use the seed-to-sale tracking software include “Cultivators, Dispensary, Testing, Transportation, and Infused Product Manufacturers, Qualifying Patient, Patient Minor, Patient Caregivers and/or Patient/Caregiver Cultivators.”
The Department issued a Request for Proposal on March 4, 2019, asking for an information solution for three different programs: seed-to-sale, patient registry, and facility licensing application. The seed-to-sale program portion of the RFP has received the bulk of the controversy.
The seed-to-sale program itself was asked by the Department to allow qualified facilities to acquire the system that integrates with the state systems to upload inventory information for near-live monitoring (within 15 minutes). The Department asked the State be able to see facility inventory at any time and that inventory is able to be monitored going from acquisition to sale/transfer.
Additionally, the program would be integrated with patient registration and qualified facility programs.
Three main companies made bids for the contract: Metrc, BioTrackTHC, and MJ Freeway.
The companies each corresponded with the Division of Purchasing and Materials Management (DPMM) under the Office of Administration. This is typical. There were some revisions to proposals from the companies.
Metrc alone was awarded the contract.
BioTrackTHC and MJFreeways protested the award towards the end of April. The BioTrackTHC protest made headlines quickly, primarily protesting the cost of RFID tags Metrc requires of licensees for tagging and tracing plants and plant product.
But the protests were denied by Purchasing, announced on May 20, who shut down the protests with a 14-page letter reinforcing their stance that there would be no variable costs to the state – and Metrc clearly understood the terms of the contract.
In an email to Stacia Dawson toward the end of March, the buyer for this RFP, Metrc emailed by stating, unequivocally, that the “amount on Line Item 11 is our firm and fixed pricing.”
BioTrackTHC opposed the confirmation of the pricing to Dawson, saying in the protest letter, “[d]espite Metrc’s reassurances to Ms. Dawson, it is far from clear that it intends to charge a firm, fixed licensing fee to the State rather than a $40 per month fee to licensees. Because Metrc’s BAFO pricing response is wholly ambiguous on this issue, it failed to provide all relevant information related to its pricing in violation of Section 2.1.2.”
Metrc had 10 days from the protest to respond.
“The RFID tag prices charged by Metrc were initially disclosed by Metrc,” the Metrc response reads, saying it further amended its bid to disclose only ”firm, fixed fees that would be charged to the state.”
“Metrc did so.”
“In an effort to be fully transparent, Metrc did not amend Exhibit B of its proposal, which had previously indicated that such commodity prices would be charged on a per plant and per package basis to users of such tags within the industry,” wrote Husch Blackwell attorney Lowell Pearson in the response on behalf of Metrc. “Notably, Exhibit B remains a part of the Contract, and at no time was the State misinformed as to Metrc’s intention to sell such RFID tags to industry licensees required to use such tags to identify their plants and processed products.”
TAGS!?
For seed-to-sale programs to operate, each plant is physically tagged from seed…to sale. These tags typically either have an RFID or a barcode used for identification that are generated by a program and printed and attached on-site. In some states, programs charge a fixed price per tag code. The winning bid from Metrc included a $40 per month fee to licensees to use the program.
Metrc operates seed-to-sale programs in 10 other states on 11 other contracts. BioTrackTHC, another seed-to-sale leader, has 9 contracts doing the same in other states. Through those contracts, they track plants by the use of tags. Tag codes – RFIDs for Metrc, barcodes for BioTrackTHC – are generated by a program that facility licensees subscribe to. Licensees must also buy tag readers, tag printers, tag paper, and other equipment needed to tag plants and plant products.
The codes generated by the program are used to trace the plants, from seed…to sale. Tags are placed with seedlings, attached when plants get larger, and when it comes to harvest, more tags are printed to go with each plant’s processed product. Again, when the processed plant is broken down for manufacturing or sold as the whole flower, each part of that plant keeps the same tag. Each step along the way is tagged. Weights are entered at harvest and manufacturing. At any point, the plant’s information is updated in the program and its journey from seed to sale can be traced.
States use these programs for several reasons, ranging from recall control to limiting diversion (product making its way to the black market for illegal sale).
The cost for the tag subscription is something BioTrackTHC called variable, because of cost per plant for RFID tags, and unconstitutional, “because it imposes unauthorized fees on licensees and limits their ability to use other commercially available tracking systems.” From cost alone of the tags, BioTrackTHC contends they should have won the contract based on the points not included in the scoring rubric for the contract.
“Assuming a relatively low estimate of 3,600,000 plant tags generated per year and the same number of package tags, this would result in roughly $2,500,000 in tag fees every year, or $12.5 million over the life of the contract,” reads the BioTrackTHC protest. “In short, the costs to Missouri licensees would be astronomical. As a result, Metrc was obligated to clearly disclose this element of its pricing for consideration. Even if Missouri generated only 10% of this already conservative estimate of plants and packages, that would increase Metrc’s firm, the fixed price by $1,250,000, resulting in Metrc receiving 27 points for solution cost rather than the 34 points it was awarded. BioTrack thus would have been the winning bidder by 3 points.”
Metrc disagrees that the tag costs or program subscriptions are fees or taxes, calling them commodity costs.
“To the extent that BioTrack asserts that those commodity costs (which it deceptively refers to as ‘fees’) are somehow illegal, BioTrack is again incorrect,” reads the Metrc response. “In fact, BioTrack cites no provision of Missouri law wherein the State is required to score, in its objective cost assessment, costs that may be imposed upon non-state entities. Rather, Missouri courts have endorsed contracts let by the State wherein a non-state entity was charged for the use of a state-contracted service, for which even a ‘fee’ to the non-state user was allowed.”
The Metrc response letter cites a case, PSC v. Simmons, where a contract awarded for prison telephone services incurred a fee to users of the service, not the State. “The court found 1) that the fees were legal, and 2) that the fees were not required to be scored in the objective cost analysis.”
Metrc fired back further at BioTrackTHC, including their catalog for equipment needed for BioTrackTHC’s program offering in Nevada.
A catalog from a company called Stover – distributed on behalf of BioTrackTHC titled, “BioTrack Core System Supported Hardware,” updated in 2019 – curated hardware necessities for facilities in the state of Nevada gives a closer look of how the RFID tags work.
Stover, among others such as MainStem, ComputerEvolutions, and Rocky Mountain Business Products, sells label printers and other hardware direct to facilities in other states.
Label printers run around $330 and up.
Tags are printed by on-site label printers, such as Zebra Direct Thermal Label Printers. These printers have a tear-off mode for printing individual tags with some traceable identifier like an RFID or barcode, similar to a receipt printer. Some printers are for cultivation facilities only, while others are used for cultivation, processing, and retail.
Cultivation hardware denoted as needed by a checklist in the BioTrack catalog lists categories of hardware for the grow terminal, harvest terminal, and processing terminal. Each terminal needs a barcode scanner and label printer. Harvest and processing terminals require scales. Fingerprint scanners are available optionally.
For labels and tags, facilities are required to have special printers, wrap tags, paper roll, and traceability tags. Would the variable costs of paper needs be an unconstitutional variable cost?
The same catalog also includes a checklist for point-of-sale, including barcode scanners, receipt printers, cash drawers, scales, label printers, mag-stripe readers, and fingerprint scanners. Metrc can be integrated with other point-of-sale systems, such as Cova and others. Additional cables and adapters are referenced throughout.
The tag cost is something that caused drama during the implementation of Washington state’s seed-to-sale tracking for medical marijuana. Metrc withdrew their bid in the state when contract negotiations fell through a month after being chosen by the state for programming.
BUT WHERE’S THE CONFUSION?
Amendment 2, not Article XIV of the Missouri Constitution, states: “The Department shall not have the authority to apply or enforce any rule or regulation that would impose an undue burden on any one or more licensees or certificate holders, any Qualifying Patients, or act to undermine the purposes of this section.” BioTrackTHC protested Metrc’s bid, saying the cost of tags would be an undue burden.
But Metrc says the tracing cost is not a burden.
“We are unaware of any accurate inventory control process that does not rely upon an identification number attached to each applicable inventory system,” reads the Metrc response. “Every state using a seed-to-sale tracking system has at least a bar code tag attached to each inventory item. Metrc’s system adds substantially more accuracy and efficiency to such inventory tracking by including RFID transponders in the bar code tags. By ignoring these fundamental details, BioTrack’s constitutional argument is an attempt to fit a square peg into a round hole.”
“[W]hether the costs of the RFID tags are an undue burden – and they are not – is beside the point; since, again, the Missouri Constitution does not prohibit the required purchase of identifier tags necessarily required by the provider of the selected seed-to-sale track and trace system. Moreover, Section 1.3(25) only applies to rules or regulations imposing an undue burden. There is no rule or regulation involved here.
“In essence, BioTrack attempts to take a commodity cost that is imposed in all states in which both BioTrack and Metrc operate, and to recharacterize and pigeonhole that cost into its constitutional argument. Once again, BioTrack cites to no provision of the Missouri Constitution that prohibits these costs. If these costs were, in fact, prohibited under Article XIV, it would say so directly.”
So does the State think that the tag cost is variable?
The protest denial letter from Purchasing says that the awarded contract makes it very clear with Metrc that there will be no variable costs to the industry.
“Metrc’s proposal and [Best and Final Offer] display an understanding of the RFP pricing provisions’ proper scope,” writes OA Division of Purchasing Director Karen S. Boeger. “In Exhibit A of its initial proposal, Metrc disclosed prices to be charged to licensees for access to the seed-to-sale solution’s software component and for that solution’s equipment in the form of RFID tags. However, that initial proposal expressed these prices as variable. In response, the Division’s BAFO request to Metrc noted the need for firm, fixed pricing in order to comply with the RFP’s requirements. Metrc adjusted accordingly.
“Its BAFO converted the previously-variable pricing of industry-paid subscriptions for access to the seed-to-sale solution’s software component into firm and fixed State-paid pricing for subscriptions to the same. Metrc’s BAFO replaced, with zero dollar figures, its previously-variable industry-paid pricing for the seed-to-sale solution’s equipment in the form of RFID tags.
“The parties’ written communications prior to award, including the issuance of the RFP, Metrc’s proposal in response, the Division’s BAFO request to Metrc, and Metrc’s BAFO in response, constitute persuasive evidence of their understanding of the integrated contract’s relevant terms.”
The contract itself states, “[o]ther than the payments and reimbursements specified on Exhibit A, Pricing Page, no other payments or reimbursements shall be made to the contractor for any reason whatsoever.”
Boeger goes on to say, “But the single reference to licensee RFID tag purchases found there…does not serve as contractual authority to charge prices to licensees in excess of the firm, fixed amounts found on Exhibit A. The organization fo the RFP, ant he proposals submitted in response to it, assists this analysis.”
The firm, fixed amount? The $40 monthly subscription cost to licensees.
NEW CONFUSION: THE RULE
In DHSS’s medical marijuana division’s final rule proposal, sent to the Secretary of State’s Office for printing along with an announcement for further public comment, was one rule that has many scraping their heads.
(7) Statewide Track and Trace System. (A) No entity holding a contract with the state of Missouri for a statewide track and trace system or any affiliates of that entity may sell seed-to-sale services or services related to compliance with seed-to-sale tracking regulations to a licensed or certified facility.
(B) Unless otherwise addressed or prohibited by contract or law, an entity holding a contract with the state of Missouri for a statewide track and trace system and any affiliates of that entity may charge a price to a licensed or certified facility for plant/product tracking labels, but no such price shall exceed the cost of producing the label in an amount that would create more than thirty (30) percent net profit on each label.
Seemingly contradictory to the Boeger letter and the information solution contract itself, its immediate relevance is unknown, but concerns BioTrackTHC, as they now protest the printing of the rules. The St. Louis Post-Dispatch insinuated the rule may be grounds for a potential lawsuit, but the direct application of the rule in light of the program contract is uncertain.
Indeed, the rule itself is not relevant to the current contract. A representative from DHSS said “the 30% rule is meant to protect the industry as a price cap in the event a vendor for the statewide track and trace system is someday allowed to charge for plant tags.”
HOW TO PREPARE TO WORK WITH METRC
For those looking to obtain a license to grow, process, transport, or sell medical marijuana, there are a few things to take into consideration as timelines and plans are made.
Metrc requires employees to complete the online training. Training can be scheduled directly with Metrc by phone or through their website after a license is obtained. After training is completed, a dispensary API key will be issued for integration into any third-party programming for program access. Once sales begin, a successful set up will give live reports to Metrc for state use. Reporting is done automatically.
WHAT’S NEXT
As far as the rule about tag costs goes, the Secretary of State’s Office can be predicted to make a statement on why they will not print the proposed emergency rules from DHSS or will print the rules. Within the past decade, at least one Secretary of State – Robin Carnahan – refused to print rules after a protest.
As far as Metrc goes, the company has already met with DHSS several times to begin work on state programming.