Harris Beach: Is Interstate Commerce Coming For The Cannabis Industry?

Harris Beach PLLC

On December 29, 2022, over 18 months after cannabis became legal to sell in New York State, the first retail dispensary is scheduled to open.  This begs the question – should it have taken this long?  Recent federal court precedent call into question the constitutionality of state residency requirements for licensees, and at least one pending case could open the cannabis industry to interstate commerce, despite it still being illegal federally.

Many states that legalized marijuana established residency requirements.  This is done for a few reasons.  One is to ensure state residents receive the financial benefits of legalization in their own state.  Another is to curtail outside entities from coming into a newly legalized state and dominating the market from afar.  With cannabis still illegal under federal law, state policymakers believe states have the right to establish state laws regulating the industry. But do they?

In New York, the Cannabis Control Board and Office of Cannabis Management require the first round of cannabis retail dispensary licenses be awarded to persons with ties to New York, including a marijuana-related conviction in New York.  But, out-of-state operators have cried foul.   Hoping to benefit from legalization, out-of-state grower have filed lawsuits.  Suits are predicated on the U.S. Constitution’s Commerce Clause[1]. Article 1 of the US Constitution contains the Commerce Clause.  The Commerce Clause charges Congress with regulating interstate commerce.  The Dormant Commerce Clause is derived from this and stands for the legal proposition that since Congress regulates interstate commerce, states are restricted from enacting legislation which discriminates against or unduly burdens interstate commerce. The focus of the lawsuits is to say state laws and regulations discriminate or excessively burden interstate commerce when it comes to cannabis regulation.

Marijuana Operators Find Agreement on Dormant Commerce Clause

Out-of-state operators are finding some success,  Certain judges are agreeing that the illegality of marijuana at the federal level bars it from regulation under the Dormant Commerce Clause:

  • In August, the First Circuit Court[2] ruled that a residency requirement in Maine violated the dormant commerce clause because it “explicitly discriminates against residents of other states and Maine cannot show a legitimate local purpose for the requirement.” In the Maine case, a Delaware corporation wanted to buy a Maine corporation that operated three licensed marijuana dispensaries; however, it was blocked from doing so because Maine’s Medical Marijuana Act required all officers or directors of a dispensary to be residents of the state.
  • In New York[3], U.S. District Court Judge Gary Sharpe issued an injunction barring the issuance of licenses in five regions of the state weeks before initial retail licenses were awarded.  The judge presides over a legal challenge by Michigan-based Variscite NY One (“Variscite”) to New York’s requirement that initial licenses go to those with New York connections and those harmed by New York cannabis laws. Variscite’s primary owner has a conviction on a marijuana-related offense but in the state of Michigan.
  • In contrast, Los Angeles[4] U.S. District Judge Sherilyn Peace Garnett ruled Variscite, Inc.[5], is not harmed by a scheduled lottery for cannabis retail licenses based on social equity factors. Variscite, Inc. argued the Los Angeles Department of Cannabis Regulation’s plan to award retail licenses violated the Dormant Commerce Clause because it was partially based on social equity considerations that included having lived in certain disproportionally impacted areas of Southern California or having a California cannabis conviction. However, Judge Garnett did say the plaintiffs “raised serious questions on the merits of their claim regarding the constitutionality of the challenged provisions” and noted that a federal judge in a similar lawsuit in Sacramento abstained from ruling on the constitutionality of the city’s residency requirements. That case is headed for an appeal in the Ninth Circuit.

And, while not settled, a licensed Oregon cannabis distribution company filed suit against the state to overturn a section of Oregon law prohibiting state-licensed operators from shipping marijuana across state lines. A favorable ruling could welcome interstate commerce.[6]

New York Cannabis Industry Faces Uncertainty

This legal backdrop is spotlighted in the Empire State.  New York regulators are now stalled. New York legalized cannabis for recreational use in March 2021, intending to prioritize licensure for those convicted of the state’s strict cannabis-related laws, referred to as “justice-involved” applicants. The New York Office of Cannabis Management accepted applications through late September and hoped to issue the first round of conditional adult-use retail dispensary licenses to “justice-involved” applicants before the beginning of the new year. The first licensees are eligible for funds from a $200 million state fund established to secure and renovate retail locations[7]. The Office of Cannabis Management has issued provisional licenses in all regions of the state not impacted by the injunction.

If the Second Circuit Court in New York follows the First Circuit’s lead, the current legislation may be appealed to remove the residency requirement and allow out-of-state entities to set up shop in New York state. This could open up a whole new wave of applicants from in and outside New York alike.

Indeed, these recent rulings will lead to a slew of similar suits across the country. If the Oregon case is settled and more follow, it could establish a national market for an illegal product. That could force action from Congress. And interstate commerce doesn’t answer other questions, such as taxation, tax exemptions, or bankruptcy protection, that result from the product being legal on one level and illegal on another.

The regulatory landscape for the cannabis industry is still very much unsettled.

[1] Article 1, Section 8, Clause 3 of the U.S. Constitution.

[2] Northeast Patients Group v United Cannabis Patients & Caregivers of Maine, 45 F.4th 542 [1st Cir 2022].

[3]  Variscite NY One, Inc. v. State of New York, Case No. 1:22-cv-01013.

[4] Variscite, Inc. et al. v. City of Los Angeles et al., Case No. 2:22-cv-08685.

[5] Variscite, Inc. is the same entity as Variscite NY One.

[6] Jefferson Packing House, LLC v. Brown, et al., Case No. 3:22-cv-01776.

[7] Despite being part of the law, $150 million that was to make up this fund has yet to be raised and various insiders in the industry are challenging the persons selected to oversee the state’s Social Equity Cannabis Investment Fund, operated in conjunction with DASNY.


Originally Published At JD Supra


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