Microscopic crystals on a cannabis flower produce hundreds of cannabinoids, terpenes, and flavonoids that make marijuana strains have different potencies and effects on humans. These compounds can be extracted and concentrated in labs. Credit: CHAD HARDER / MTFP

MISSOULA — A Missoula judge has denied a request by three medical marijuana providers who were seeking permission to work with a commercial extraction lab.

The decision came Friday during a hearing in Missoula District Court, where Green Tree, Spark1, and Urban Farmer argued that the Montana Department of Public Health and Human Services should permit them to do business with Willow Bark Science, a THC extraction lab. THC is the psychoactive compound in marijuana, and concentrated THC can be used to make various products, including edibles.

Two other providers — Lionheart Caregiving and Big Sky Herbals and Edibles — sued the state in November after the Department of Health and Human Services backtracked on a decision to allow them to work with Willow Bark. Under a stipulated agreement reached in December,  state regulators have allowed Lionheart and Big Sky to work with Willow Bark as long as they follow regulations for tracking the production and sale of marijuana.

The three providers who were in court on Friday recently joined that lawsuit and were asking the judge for similar approval.

The legal battle has shined a light on the disagreement and confusion in the industry over how the state regulates business between providers and independent THC extraction labs.

During the hearing, an attorney for DPHHS accused Willow Bark and some of the largest providers in the state of breaking state law for doing unlicensed business with each other last year.

Under an agreement reached between Lionheart and Big Sky and the department, the two providers can continue to work with Willow Bark as long as they follow the requirements set forth in the state’s seed-to-sale marijuana tracking system, known as Metrc. That agreement remains in place.

The Metrc system wasn’t fully implemented last August when the providers applied for permits to work with Willow Bark. That led DPHHS to initially reject Lionheart and Big Sky’s permits, which led to the lawsuit a few months later.

The providers who appeared in court Friday said they, too, should be covered by a similar stipulated agreement to work with Willow Bark. Under the existing agreement, Lionheart and Big Sky have a competitive advantage through exclusive dealings with Willow Bark, and that advantage came courtesy of the department, the providers argued.

Missoula County Courthouse. Credit: HUNTER PAULI

Helena attorney Brian Miller, who represents all five providers in the lawsuit, tried to make this point during questioning of Tyler Smith, an investor and technical consultant to Willow Bark and spouse of Willow Bark’s owner, former Missoula Democratic State Rep. Ellie Hill Smith. Tyler Smith appeared as a witness for the plaintiffs.

Miller asked Smith about how DPHHS’s refusal to issue permits hurt business between Willow Bark and the providers. During that questioning, Smith said Willow Bark had worked with five to 10 providers, including Urban Farmer and Green Tree, prior to August, when the department began accepting applications from providers to work with third-party contractors, and before the Metrc tracking system was fully implemented.

When Missoula District Judge Robert “Dusty” Deschamps asked why those other providers haven’t also sued the department, Miller said it was because DPHHS had confused providers by stating on its website that third-party contracting wasn’t allowed. Since providers thought it wasn’t allowed, those providers didn’t apply for permits. Therefore, they never got rejected, and so they had no reason to sue, Miller said.

The fact that Willow Bark and providers engaged in business dealings prior to August was apparently a surprise to the department’s attorney, Andy Huff.

The department’s legal defense was based on the fact that there was no prior business between the three plaintiffs and Willow Bark. If there was no business, then not issuing permits did not interrupt business, and thus caused no harm, according to Huff.

Huff said the previously undisclosed business between Willow Bark and providers would have been illegal under the state’s medical marijuana law.

“We didn’t know about that,” Huff said.

Miller disagreed with Huff’s courtroom allegation.

In an interview after the hearing, Miller said Huff’s interpretation suggests every provider in the state broke the law, because the department rolled out new regulations over time. The purpose of the delayed roll-out was to give medical marijuana businesses time to get into compliance with the law.

Deschamps denied Green Tree, Spark1, and Urban Farmer’s motion for a preliminary injunction. He said his decision was based on the fact that only Smith had said that there had been prior business between Willow Bark and the providers, and that the providers didn’t show how they had been harmed by the department’s refusal to grant permits to work with third-party contractors.

Deschamps issued his denial without prejudice, meaning the plaintiffs can bring the argument back to court if they present additional evidence that shows how they were harmed.

Huff said the department hopes to post administrative rules clarifying third-party contracting on Feb. 22, but multiple bills in the Montana Legislature could upend the whole process.

Hunter Pauli is a Seattle-born, Missoula-based freelance investigative reporter and a graduate of the University of Montana School of Journalism.You can follow Hunter on Twitter.