Washington state decides to work it out with third-choice marijuana sales tracking vendor

Despite months of technical glitches, Washington state opted recently to maintain its contract with the vendor that provides its marijuana sales tracking system.

The five-year contract with MJ Freeway Business Solutions, entered into last year by the Washington State Liquor and Cannabis Board, gives the state an annual option to terminate the agreement, but was continued this month even after widespread reports of technical issues and outages. Contract documents obtained by StateScoop show the state agreed to pay MJ Freeway $800,000 for the initial implementation and an additional $3 million in subscription fees over the life of the contract. The company, which has clients in 23 states and the District of Columbia, has lost customer data, been blamed for governments and businesses losing revenue revenue and suffered security breaches affecting more than 10,000 patient files.

But the struggling IT system comes with a history and legal context that state officials say have left them with no better option.

Brian Smith, a spokesman for the liquor and cannabis board, told StateScoop the MJ Freeway system’s defects were known before it launched in February. There’s a plan underway now to fix the problems through a series of updates scheduled through early fall, he said, but selecting the vendor was “a tough decision” from the start, given the spot the state found itself in last year.

MJ Freeway, founded in Denver in 2010, became Washington state’s second vendor for its “seed-to-sale” marijuana tracking system in July last year. The state’s previous vendor, the Ft. Lauderdale, Florida-based BioTrackTHC, chose last year not to extend its contract. That meant the agency needed a replacement vendor before its old contract ran out on October 31. The state solicited bids, but the top bidder backed out, leaving the agency with its third choice: MJ Freeway.

After the agency’s contract with its previous vendor expired, but before the new vendor was ready to launch, it was left operating in what officials called a “contingency period,” a sort of technological limbo in which there was a lot of manual, paper-based reporting.

A lot of people liked the contingency system, Smith said, but smaller growers claimed it put them at a disadvantage because they didn’t have access to the state’s free system. So launching an IT system that the board knew wasn’t ready yet, knew would have technical problems, was considered the best available solution.

Marijuana has become a $1.5 billion industry in the state since 2012, when Washington legalized recreational use, and now generates $379 million in annual revenue for the state. That the cannabis board has struggled to attract the sufficient expertise it needs to maintain a system that works properly is something of an anomaly in the public sector IT world. Systems fail, but it’s rarely because there’s a shortage of companies willing to do the work.

“Because this is illegal federally, it throws a wrench into everything we do,” Smith said. “In a normal bid like this, you would have major companies — Microsoft, or whoever — running bids for this. They don’t want to touch it, so what you have in a lot of cases is niche industry IT companies that address this particular issue, but they are not on the scale of some of these major IT companies that we know.”

Marijuana cultivation, sale and use became a little more illegal in January when Attorney General Jeff Sessions, who has claimed marijuana is linked with increased violence caused by organized crime, rescinded three Obama-era memos that provided states where the drug had been legalized a certain level of protection to operate their businesses. One of the key memos, drafted by former U.S. Attorney General James M. Cole, enabled that hands-off approach by permitting federal prosecutors to focus their resources away from state marijuana businesses so long as those states complied with a few requirements.

The Cole memo required states where marijuana was legalized to demonstrate that by allowing its distribution, they were not also interfering with other federal priorities. This meant states had to show that they were preventing distribution to minors, preventing revenue from going to gangs, among a host of other concerns commonly associated with the drug trade. The political upshot of Sessions’ memo roll-back is that the 30 states where marijuana is legalized can now not be as certain that they will be protected from federal prosecution.

The technical outcome is that while states like Washington may no longer need to comply with the laundry list of requirements in the rescinded memo, Smith said his office is “doing the responsible thing” and continuing to demonstrate to the federal government that its meeting those requirements anyway.

Those requirements are why marijuana sales tracking systems must be so complex, accounting for every step along the manufacturing process.

“They wouldn’t even have a traceability system if it was legal at the federal level,” Smith said. “It would just be the system like alcohol does — [businesses] report the volume of their sales and they pay taxes on it.”

In security breaches in January and June of 2017, hackers successfully shut MJ Freeway’s system down nationwide, affecting more than 1,000 dispensaries. The hackers also published the company’s source code on Reddit, according to Forbes. The company’s chief executive, Jessica Billingsley, claims it was one of her competitors that did it. Nevada subsequently canceled its contract with MJ Freeway, and signed an agreement with Franwell, the vendor that backed out of the Washington bid.

Between hacks and other glitches, MJ Freeway also lost customer data last year, but the company’s CEO said in an interview earlier this month that 90 percent of that data had been recovered.

The system’s problems have continued into 2018. Claims that the system was recording incorrect sales data , or that people couldn’t log in , or that licensees were not appearing in the system — have persisted for months. Three-quarters of Washington marijuana licensees use third-party software to connect with the system, according to the agency, but ensuring that software integration has worked properly has also reportedly been a struggle for MJ Freeway, according to the state.

Continued system failures rubbed off on marijuana businesses. One grower told Marijuana Business Daily in February that it had cost “at least” $10,000 in lost sales. A retail shop owner estimated he was only able to accept one in 10 shipments from producers.

And in June, the Liquor and Cannabis Board announced “there had been unauthorized efforts to tamper with data derived from commercial software that integrates with the state traceability system.” As a safeguard, the agency recommended that third-party software providers work with their customers to reset their API keys.

However, MJ Freeway told StateScoop that third-party integration has been progressing along with the overall health of the system in recent weeks — 25 third parties have been integrated so far, said Jeannette Horton, MJ Freeway’s vice president of global marketing and communications.

A letter from Franwell explaining why it withdrew from the Washington state bid may explain some of the problems MJ Freeway has had so far. The Franwell letter explains that “during the initial engagement, discussions and contract negations it became clear that certain areas of our solution’s implementation would require changes and modifications to meet the WSLCB requirements. These changes would significantly alter the process we have successfully implemented with our other State partners.”

“That’s definitely the position we were in,” Horton said. “The requirements from Washington were robust, they were enhanced, they were unique.”

Horton said Washington’s isn’t MJ Freeway’s first state system, but that it has been a difficult project nonetheless. Horton said she applauded the state for its approach and said that while government may often prefer to work with large vendors that it already has contracts with, engagements like these give small technology startups a chance to compete, and compete in a state that’s become known as an outspoken proponent of marijuana legalization.

“The noise in Washington is very loud,” Horton said. “They’re louder than other states, and other states we’re in you don’t see as vocal a cannabis community, but I think that’s good. That kind of engagement’s great — it’s part of their push in what they want to see and what they want to see in the system.”

The Washington agency has now hired consulting firm Gartner to investigate the MJ Freeway system. And as the state awaits the report’s release, scheduled for August, the board looks back on how it got here. When Washington built its first marijuana licensing system from scratch several years ago, Smith said, the state didn’t have such a large, complex industry in mind.

“It far exceeded what our initial plan was,” he said.

This story was updated on July 20, 2018 to add comments from MJ Freeway.

This story was updated on July 23, 2018 to include project costs.