SALEM — The latest step in a rejected pot retailer's lawsuit against the city has presented a challenge that could affect deals between retailers and communities across the entire state.

Mederi, one of four businesses that unsuccessfully applied to open a recreational marijuana business in Salem, sued the city for the right to a license toward the end of last year.

A hearing Monday in the case was the subject of an amended complaint filed on Feb. 5, where Mederi added the Cannabis Control Commission as a defendant in the suit and added a third count challenging the legality of host agreements city Mayor Kim Driscoll signed with the four successful applicants.

A Salem Superior Court judge could issue a ruling by the end of next week. 

Host agreements are a critical part of opening a pot business in Massachusetts. Through them, a town or city can establish parameters that protect it from ill effects of that business opening, and can signal support for a business getting a license once those protections are in place. But along the way, some have argued that agreements go above and beyond the spirit of what the documents were designed to do, creating scenarios that have often been described as pay-for-play — a notion city leaders have strongly argued against.

Salem has agreements with five businesses, including Grove Street medical dispensary Alternative Therapies Group. ATG became the third retail marijuana shop to open in the state in December, although recreational sales are currently on hold. The other four are still working to get licenses from the state. Three of those businesses secured host agreements in December, while the fourth was inked in January.

In those agreements, all five businesses agreed to share a total of 7 percent of sales with Salem. That starts with a 3 percent "community impact fee" to offset and pay for the negative impacts a business can bring to a city. The deals also incorporate another 3 percent as a general annual payment, one percent targeting a "Transit Enhancement Fund" and a minimum of $25,000 in charitable donations targeting organizations of the business' choosing.

Two of the applications, however, go well beyond those terms. Seagrass, which seeks to open on Dodge Street, will donate $110,000 to four different organizations, and for sales that go beyond $750,000 in a single month, an extra 1.5 percent of sales will go to the city. For sales beyond $1 million in a month, 2 percent will be given to Salem instead. And Atlantic Medical Partners, targeting Highland Avenue, will donate $60,000 to the city's general fund each year and also send $40,000 toward various organizations and Salem artists.

In its newest complaint, Mederi argues that all of those agreements are "in excess of that authorized" by state law. Based on that, the Cannabis Control Commission "lacks the authority and power to issue a license for a marijuana establishment to an applicant who does not hold a lawful (host agreement)."

Crossing a line?

Mederi is not alone in this argument. Industry consultant Jim Borghesani — who served as spokesman for the campaign to get marijuana legalized in 2016 — has previously argued the deals all go well beyond the spirit of what voters approved that year.

"That line is being crossed in approximately every host community agreement that's being written (in the state)," Borghesani said. "We're seeing payments beyond what the legislation allows, usually in the guise of charitable payments."

And Salem's agreements were at the time starting to get attention for their size, according to Borghesani.

"I had heard something about Salem having an additional percentage tax as well," Borghesani said in December. "That's just outrageous."

The argument from Mederi could have huge implications should it succeed. That was so noted by Judge Timothy Feeley during the hearing Monday afternoon.

"The consequence of a ruling in your favor might have a precedential impact on other applications," Feeley told Mederi lawyer William Sheehan. "You're asking me to affect the rights of other parties not before the court."

That led Feeley to say the injunction sought by Mederi can't be granted without the other four Salem companies appearing in court and defending themselves. Sheehan argued that would be the next step.

With the amended complaint, Sheehan said, the company is simply asking the court to rule the Cannabis Control Commission has a duty to determine whether or not host agreements are legal. Through that, it wields the power to decide who does or does not get a host agreement.

Since the start of the case, the company has argued that the city of Salem does not have the power to decide which companies get host agreements. Instead, according to Mederi, the city should issue agreements to all applicants and let the commission determine which ones receive licenses. 

A question of fees

Feeley and Sheehan's back-and-forth lasted for 44 minutes and repeatedly focused on the state statute saying communities can deal in a 3-percent community impact fee. Sheehan argued the wording signifies that there can be nothing more than 3 percent overall, while Feeley repeatedly suggested the specific inclusion of the word "impact" in the latest version of the law meant that the 3-percent limit only applied to that specific fee.

"The charitable contributions would be... I don't know about whether it's a fee, but let's assume it's a fee... it certainly isn't directly proportional to the costs," Feeley said. "The transportation fee, it's closer, but I don't know if it's reasonably related. There has been a change."

"Somebody made sure the city isn't getting more from the establishment than what it costs the city that establishment to operate," Sheehan responded. "Giving it a name, I suggest respectfully, doesn't mean what the city says it means — and what 'that' means is the city is free to charge any other fees unless it's called a 'community impact fee.' That's pay-for-play, and pay-for-play isn't what we wanted here. In fact, it's the opposite."

In the city's response, assistant solicitor Victoria Caldwell said the $25,000 donation to charities and the three fees were established in negotiations with ATG, at which point they became the standard for all other businesses to sign on to as part of applying with the city.

"We weren't getting into a pay-to-play situation, because we set down a minimum criteria," Caldwell said. "If people were going to offer more, we would certainly take that, but we weren't going to ask for more."

And that, Caldwell said, was Salem's City Hall doing its job.

"Cities and towns like Salem have always tried getting good community benefits and found good partners to work with, and I don't think there's anything wrong with that," Caldwell said. "The city has done right by its taxpayers and the folks who voted for retail marijuana here."

Contact Salem reporter Dustin Luca at 978-338-2523 or DLuca@salemnews.com. Follow him on Facebook at facebook.com/dustinluca or on Twitter @DustinLucaSN.