WSLCB - Board Caucus
(July 19, 2022) - Social Equity Programs

An expert briefing on social equity programs was a “depressing" preview of challenges any effort to distinguish applicants by race-based criteria would likely face before a “hostile” federal judiciary.

Here are some observations from the Tuesday July 19th Washington State Liquor and Cannabis Board (WSLCB) Board Caucus.

My top 3 takeaways:

• Policy and Rules Manager Kathy Hoffman introduced Colette Holt to talk about "best practices" for implementing social equity programs.
  • On July 12th, Hoffman reported that Holt was the Owner of Colette Holt and Associates as well as the American Contract Compliance Association General Counsel, and would speak as "a nationally recognized expert in designing and implementing similar programs." Her company had a history of providing disparity studies to municipal and state governments and agencies, several of which were for Washington State:
    • State of Washington - 2017 Disparity Study, Presentation
    • State of Washington - 2019 Disparity Study
    • State of Washington Department of Transportation 
      • Washington State Airports - 2019 Disparity Study
      • 2021 Disadvantaged Business Enterprise Program Disparity Study (SOQ Packet A / Packet B)
    • Port of Seattle - 2019 Disparity Study
  • During the caucus, Hoffman acknowledged Holt’s background handling issues of employment discrimination, regulatory compliance, and program evaluation and implementation (audio - 2m, WSLCB video, TVW video).
    • With more than two decades of experience after working in “senior legal and management” roles, Hoffman described how Holt’s work had led to her being “a frequent author and media commentator” on affirmative action and employment topics. Holt was the “former vice chair of the American Bar Association’s (ABA) Public Contract Law section” in addition to being an adjunct professor at the Loyola University School of Law and the John Marshall School of Law.
    • Hoffman told board members that Holt’s remarks would cover “constitutional standards applicable to minority business programs with an emphasis on the two elements of strict scrutiny and the two types of proof related to the compelling governmental interest requirement. And how these might inform best practices associated with implementing social equity programs.” She emphasized that Holt was "not providing legal advice to the board," but joined “for a general discussion around this topic” and the WSLCB social equity program.

• Holt shared her insights on the contours of a successful social equity program, cautioning against likely legal fallout from using explicitly racial considerations in the program’s design (audio - 10m, WSLCB video, TVW video).
  • Calling Washington state “somewhat of a second home" due to her repeated work in the state, Holt noted that her firm was beginning their third disparity study for the Washington State Department of Transportation (WSDOT) and would be doing a study for the City of Seattle in the near future. She highlighted that her remarks were “not legal advice" and that in a public meeting “anything that gets said here today would not be privileged."
    • At publication time, the Seattle City Council Finance and Housing Committee had been considering a dedicated program to support cannabis sector equity and worker opportunity. After information sessions on February 16th, March 2nd, and April 6th, the committee was due to hear about potential legislative proposals from representatives of the mayor’s office at their Wednesday July 20th meeting.
  • Holt was "happy to answer any questions about it,” commenting that she’d been approached "by a couple other states about this whole cannabis issue" and her sense was that “nobody has a good answer” on what “we would all like to see”: communities “that were so devastated by the so-called War on Drugs share in at least some of the benefits and upsides of marijuana deregulation.” Remembering having been shown Reefer Madness in her youth, she found the change in cannabis policy “head spinning.” Recognizing “that devastation was not equally put on people,” and that some “communities certainly bore different burdens under it,” she felt “the sad, unhappy fact of the matter is that we have a federal judiciary that has lurched increasingly to the hard right” and she anticipated that federal courts would be increasingly “hostile.” Considering former conservative Justice “Warren Berger is looking pretty good,” Holt encouraged the board to “be realistic about what is possible.”
  • Litigation over the preceding years suggested to Holt a “direct through line" from Citizens United v. Federal Election Commission (FEC), a 2010 ruling by the U.S. Supreme Court about campaign finance laws and free speech under the First Amendment, to Shelby v. Holder, a 2013 ruling regarding the constitutionality of provisions of the Voting Rights Act of 1965, to cases decided by the court in 2022 on issues ranging from “the school prayer case, to the gun rights cases” and other controversial actions by the justices. Lower profile cases which she felt reinforced this perception included:
    • “One that got filed last Wednesday in the Middle District of Florida,” Holt stated, challenging “provisions for socially and economically disadvantaged businesses in the Infrastructure Act.” Small businesses would be further disadvantaged “if the Biden administration is not able to do anything to help” them access the “once in a generation level of spending,” she said. More troubling for Holt was the argument in the suit that “the government must itself have actively discriminated and be able to identify specific episodes of active governmental discrimination in order to have a program.” The expectation under this standard to show “active, episodic, identified, proven discrimination” struck her as an “impossible test to meet.” Holt was even more concerned that, “if this spreads,” the suggested standard would “be the death of these programs.”
      • Read a November 2021 article on the New Infrastructure Bill and Its Impact on Disadvantaged Business Enterprises in the Construction Industry.
    • Holt mentioned Students for Fair Admissions, Inc. v. President and Fellows of Harvard College, a case challenging the affirmative action program in the Harvard University admissions process the Supreme Court agreed to hear in January 2022 alongside another case related to admissions practices at the University of North Carolina. Arguing that Justice Clarence Thomas had “been on record for 30 years now, opposed to affirmative action,” she felt he was “leading the way” in judicial opposition to the topic.
    • Identifying a case where Oregon officials attempted “to put together a [coronavirus] relief fund for Black businesses and immediately got sued and shut down,” Holt associated a similar injunction in June 2021 stopping relief funds from being allocated to restaurants owned by women, veterans and disadvantaged groups. She believed that “the most egregious case” involved 17 legal challenges against the U.S. Department of Agriculture (USDA) for trying “to help disadvantaged farmers, which primarily meant Black farmers.” One such case brought in Texas as a class action lawsuit by White farmers amazed Holt as the plaintiffs had “a civil rights class action certified in the federal courts.”
      • Learn more from a June 18th article about opposition to the Texas lawsuit.
  • Not wanting to be “the skunk at the party,” Holt still wanted WSLCB officials to “be realistic” about how courts might rule on a challenge to any equity program. She didn’t believe the standard in the Florida case could be met by any agency trying to impact social equity in cannabis or other industries. "If you put anything in your program that gives any kind of explicit preference on the basis of race," Holt was confident the board would be sued “and I suspect you’re going to lose.” She further argued that opposition would be “extraordinarily well funded” and “they will probably have the federal courts on their side.” In order to have a functioning social equity program, Hold advised some “not terribly obvious proxies for where you’d like to get to” as direct preferences based on race were “going to fail in court.”
    • Concerns over the legality of any preferential treatment for social equity applicants were given as a reason Washington State Legislative Task Force on Social Equity in Cannabis (WA SECTF) appointee Senator Curtis King opposed or abstained from task force recommendations.

• Board members had many questions for Holt about the implications of proposing race-based criteria to the courts, the overall effectiveness of equity programs, residency requirements, and other best practices when attempting to increase equity in the cannabis sector.
  • Board Chair David Postman shared that in his prior work for Governor Jay Inslee, Holt had spoken to them about the WSDOT study as well as a Washington State Department of Enterprise Services (WA DES) disparity website maintained by Colette Holt and Associates. All of this was prior “to the court of horrors that we have today,” but he remembered “some of these same messages were there” about how regulators establishing a racial preference in law would need to “be cautious.” Asking Holt to think about the federal judiciary as it existed “eight years ago,” Postman wanted her to speculate as to whether states could “have said ‘These licenses should go to Black people’” (audio - 8m, WSLCB video, TVW video).
    • Holt didn’t think such an explicit law could have been upheld “probably since the Croson case” in 1989, a Supreme Court ruling that a Richmond, Virginia program preferencing minority businesses in the awarding of city contracts was unconstitutional under the Equal Protection Clause. Her view was that WSDOT “federal money has a semi safe harbor”---although “the seas are getting mighty rocky”---through a federal Disadvantaged Business Enterprise (DBE) program with a “very solid Congressional record” supporting establishment of “narrowly tailored” programs in states.
    • “Up until now, the courts have not adopted this intentional, episodic test,” Holt asserted, but the Sixth Circuit Court of Appeals “in the restaurant case, said something kind of along those lines” mentioning both “traditional strict scrutiny, but then threw in…this dicta about ‘intentional discrimination.’” She called the Sixth Circuit ruling “a mess, but it’s a worrisome mess.” Holt believed courts eight years earlier would have had to meet a traditional strict scrutiny standard: “a strong basis in evidence that there is a discriminatory market for your licenses, not that Black people were discriminated against by the war on drugs, that’s too attenuated for the courts.”
    • She relayed that she’d told officials in Illinois that she wasn’t sure “how you do a disparity study on cannabis, especially because there’s no external market, you are the market.” Holt thought it was possible that courts would say “if there’s discrimination in the market, it’s because you’re operating it.” Another problem she envisioned would be showing there wasn’t a “less racially burdened way to get where you want to get to, and did you make any efforts to do that?” Holt thought that in the judicial system Postman was remembering, it still would have been difficult to justify cannabis licensing with required racial preferences.
    • Postman said that a Western States Paving v. Washington State case helped him understand the “number of steps that…a government would have to take,” including a disparity study, “try a race-neutral [approach], and then maybe…you could get to that point.” Holt replied that, federally, there was “a congressional record that you can rely on for your strong basis in evidence” and be able to “skip” the disparity study. In her WSDOT disparity study from 2019, there’d been "pretty good evidentiary ground" of discrimination in some contracting and that a program to address it was narrowly tailored to the problem after having proved “real disparities.” WA DES officials had less formal voluntary options and not a program with established preferences, but “we found disparities there, too.”
      • Holt couldn’t speak to Initiative 200, a 1998 ballot measure limiting affirmative action by the state that she termed an “independant problem that you have.” 
        • Governor Inslee rescinded a directive on the initiative on January 17th based on updated guidance from the Washington State Office of the Attorney General (WA OAG) and signed a replacement executive order to instruct “agencies on how to move forward with achieving equity while still complying with I-200.” 
      • Additional publications by Holt’s firm include:
        • Western States Paving Company v. Washington State Department of Transportation: Ninth Circuit Upholds Federal Disadvantaged Business Enterprise Program for Transportation Contracts But Strikes Down State’s Implementation of Program Regulations (2007)
        • The Government Wants to Know: Responding to Requests for Employee Background Checks and Other Data (2002)
    • Cannabis equity remained “problematic” in her view. She felt the state would need to concede to having “actively discriminated against somebody” for a race-specific standard to be upheld for a cannabis program. Acknowledging she wasn’t familiar with legal cannabis or the WSLCB licensing process, Holt nonetheless thought unless there was a “submarket" for licenses to be sold that officials could show was discriminatory “you always would have been on some shaky ground.” She concluded that “if your objective is to get licenses issued” in order to “get as much equity as you can” then regulators needed to know that a program that "will get you instantly sued" may keep the state from addressing equity in any form. Holt mentioned that regulators in Illinois had been sued “three or four times” over their equity program even though “they keep tweaking it and trying.”
  • Board Member Jim Vollendroff wanted to know “about systemic racism" and if there was “a case to be made" about institutional discrimination in federal courts even as he knew there was pushback “with proving systemic racism or having everybody understand or believe in systemic racism.” He proposed a “basis to demonstrate over-incarceration of communities of color," poverty, and other factors (audio - 3m, WSLCB video, TVW video).
    • “Frankly, no,” Holt answered bluntly, explaining that since the Croson case in 1989, finding an acceptable argument for the programs for federal courts “bedeviled us” but precedence had been established looking at “direct opportunities impacted by race for whatever industry it is you’re looking at.” To her knowledge, those arguments hadn’t been raised about the cannabis industry, but she expected courts to apply standards used in other business sectors.
    • Holt’s personal view was that “I don't think we could get…five Supreme Court justices to sign onto the concept of systemic racism” and there were a significant number of “federal judges who don’t believe it exists.” She pointed out that Justice Amy Coney Barrett had previously signed onto an opinion that “said that being called the N-word at work is not, per se, a hostile work environment” which was discouraging for Holt, who felt Barrett’s views on discrimination weren’t sufficiently aired during her confirmation hearings in 2020.
  • Referring to Holt’s experience with state contracting, Postman asked if there was “anything out there in licensure like this” where racial preferences were used (audio - 3m, WSLCB video, TVW video).
    • Holt wasn’t aware of a situation where there had been license prioritization based on race. “Low-income tax credit programs” for developments in “certain neighborhoods or certain ZIP codes” hadn’t been challenged, but she conceded such programs also weren't “race-based.” Postman noted that geographic location was a factor considered by the equity program, but they were looking for “all the other things that you could put in" a program such as “demonstrable bad experience with the war on drugs.” Holt agreed that "you'd certainly be on much firmer ground" prioritizing race-neutral factors but it would be up to officials to decide if their program “had any remote chance of working in reality.”
  • Postman sought Holt’s opinion on whether equity programs with race-neutral criteria “have a beneficial effect” (audio - 2m, WSLCB video, TVW video).
    • Holt shared a story about how much investment money was coming into cannabis, saying a lawyer friend had a “thriving practice” focusing on “private equity firms that want to invest in cannabis businesses” where the “minimum ante” to participate was $25-35 million. This gave her pause in encouraging individuals who may be "socio-economically disadvantaged" to join a business with so many large economic interests already involved, as they’d need to “inspire” investment in their businesses.
    • Postman noted that restrictions around out-of-state ownership of cannabis businesses may be “holding down the price of admission" although some were concerned about the impact of federal legalization. Nonetheless, he felt Washington state “should be the place you can start” without having been “taken over by conglomerates…we want to try and protect that.”
      • At publication time, legislation had been repeatedly proposed to allow for out-of-state ownership - and the topic had been divisive among cannabis stakeholders.
  • Holt inquired about the state residency requirement for cannabis licensure and, once it was explained, told the board that the requirement would “certainly help.” Postman said the entire market wasn’t “small business” as there were several companies holding multiple licenses and he recognized that the more “mature” their cannabis industry became the more “existing people have a stronger hold on that market” (audio - 4m, WSLCB video, TVW video).
    • Holt’s impression was that federal prohibition of cannabis meant "lenders just don't lend" and so "you really need cash” to run a cannabis operation. She’d been aware that “hundreds of thousands of dollars of cash” moving “every day” through a cannabis business was untenable. Holt suggested a loan program was a possible way “to help people manage that cash flow” but she believed “that's a very expensive undertaking.”
    • Postman told her officials had seen “a terrible surge in armed robberies” in part due to cash management problems, but technical assistance grants and mentorship programs were intended to help equity applicants succeed once licensed.
    • Hoffman clarified that out-of-state investment in cannabis businesses was permitted, but not ownership.
  • Vollendroff asked Holt for any “pathways or some best practice examples that maybe you've seen nationally" which could help that didn’t include racial preferencing (audio - 4m, WSLCB video, TVW video).
    • "I'm not sure I'm seeing any,” aside from residency or location requirements which the Washington state system would likely feature, she remarked. Expunging criminal records in an equity program “can get tricky,” argued Holt, if someone argued it was “a proxy for race” not used by the state in other industries. She encouraged rules that matched their standards for liquor with “not too big of a gap” as similar standards would be “more compelling to a court.” Holt regarded approaches attempted by leaders in Illinois as hindering overall licensure of cannabis, and claimed the lawyers for the state “just kinda gave up." She had yet to see “anything that works particularly well, partly because of the unique nature of” cannabis.
    • Holt theorized that individuals already holding licenses could be required to subcontract with minority-owned businesses for certain business development activities, though she wasn’t sure agency leaders were “in any position to try to manage all that.”
  • Hoffman returned to the class action case against a USDA support program for African American farmers, finding it “sad, but really interesting.” Holt agreed that if those farmers couldn’t satisfy a court standard in that case, “I don't know what's going to be” good enough. She noted the number of lower court judges appointed during the Trump administration had impacted the composition of that branch of government in ways likely to impact courts and the public for years to come because a lifetime appointment to the federal bench was “a really great gig.” With regards to the social equity program, she pushed the board to “do what you can” and not let “the ideal be the enemy of what’s possible.” She backed using cannabis revenue for reinvestment into communities harmed by prohibition as potentially “more useful” than programs to help minority businesses which tended to make “a couple people…reasonably wealthy” and differed from “restorative community work” (audio - 5m, WSLCB video, TVW video).
  • Postman’s last question was a hypothetical presuming that “if we start this program without race in our rubric, and it’s two years down the line, and they say ‘all your social equity licenses went to…rich White people,’ I know we have a Supreme Court issue still but does that help us for a next step that maybe…has some race” as a criteria or preference. Holt advised them to “continue to collect information” on equity within the industry, otherwise officials would have “to start from scratch” when evaluating the topic (audio - 3m, WSLCB video, TVW video).
  • Summing up her remarks, Holt applauded the work of the board, but "eventually reality wins" and her personal view was that the nation had a "federal court system that…is imposing a White Christian nationalist patriarchal ideology on this country.” Postman found her candid views “depressing" but he personally agreed with her “view of the world.” He promised those interested that the board was “getting close” on a Social Equity rulemaking project, predicting there would be progress on implementing the social equity program "soon, soon, soon, soon" (audio - 2m, WSLCB video, TVW video).

Information Set