Horst Legal Counsel: In Critical Dormant Commerce Clause Case, Second Circuit May Be Poised to Split the Baby, Not Split the Circuits

On December 19, the United States Circuit Court of Appeals for the Second Circuit held oral arguments in Variscite NY Four, LLC v. New York State Cannabis Control Board, the latest front in an ongoing legal war over whether the dormant Commerce Clause (“DCC”) should apply to the state-licensed cannabis industry. With the caveat that reading the tea leaves of oral arguments is far from an exact science, it would appear that at least two members of the three-judge panel, Judges Guido Calebrese and Dennis Jacobs, may be ready to rule that the doctrine does apply. Indeed, during the arguments, Judges Calebrese and Jacobs echoed much of the reasoning from the amicus brief that I recently filed in the Ninth Circuit on behalf of the Alliance for Sensible Markets. The third member of the panel, Chief Judge Debra Ann Livingston, appeared skeptical that the DCC should apply to an industry that remains illegal under federal law.

Judge Jacobs noted that New York had previously had its CAURD Program stricken down by the District Court under the DCC and then settled, questioning why the court should not as a result “now look with a cold eye concerning this arrangement, which might be viewed as just an effort to achieve, by hook or crook, what the CAURD Program set out to.” The attorney for the New York State Cannabis Control Board responded, among other things, that the parties had not raised the issue of the DCC’s applicability in the Variscite One case referenced by Judge Jacobs.

Judge Calebrese, though, appeared to have strong thoughts on this question. If the issue is whether Congress has allowed or prohibited local discrimination in interstate commerce, he asked the State, “ does it really matter whether something is illegal, but allowed and is in commerce … what’s the difference between marijuana and almost anything else in which there is some kind of national market, whether we like it or not?” Counsel responded that Congress had expressed its intent to discourage an interstate cannabis market, but, as Judge Calebrese pointed out, that is not the same thing as permitting local government discrimination in that market, to the extent that it exists notwithstanding Congress’s efforts to prohibit it.

The focus of Judges Calebrese and Jacobs’ questions–to Variscite in particular–then turned to how the court should rule, assuming that the DCC does apply. Much of this discussion centered around the very premise raised in our Ninth Circuit amicus brief: That states have a legitimate interest in creating restorative justice programs designed to ameliorate their conduct during the War on Drugs, and that in so doing, a state can legitimately focus relief towards those whom it impacted directly without offending the DCC.

Judge Jacobs acknowledged that the effect of the law in question seems to be to favor New Yorkers, but pushed Variscite’s counsel as to why it was not nonetheless a legitimate action where “the main thrust of it seems to be what people call ‘restorative justice.’” He noted, as we did, that while the program’s preferential treatment of those having faced arrest in New York likely benefits more New Yorkers than those outside the state, it would also apply to those arrested while visiting from other states and those who have since moved to other states as well. While Variscite’s counsel suggested that there “a million ways” that the State could have redressed its past wrongs in less discriminatory ways, the examples of possible alternative he gave when asked–tax rebates and tuition breaks for college–while perhaps broader in reach, are not obviously less discriminatory against interstate commerce.

Judge Calabrese’s final question seemed to sum up the manner in which he and Judge Jacobs were framing the question before the court: “What we’re really asking is, assuming the [DCC] applies generally, isn’t this a special situation in which the interest of the state is so great that it overcomes the [DCC]. The argument that somehow our own unjust–our own unjust–criminal system can only be corrected by something locally ….”

Conclusion

What I said up front bears repeating: Forecasting appellate court decisions based on oral argument is a fool’s errand. But from this fool’s perspective, the court’s questions suggest that a majority of the panel believes that the DCC applies to limit local regulation of the cannabis industry. Further, the same majority would seem to believe that it is at least possible for local governments to permissibly act in a manner that favors their own residents where those governments are focused on redressing their own wrongdoing. It is less clear whether either of the judges in that majority believe that New York’s program, specifically, can pass muster assuming that the DCC applies, and it would not shock me if each member of the three-judge panel writes their own opinion in the case. What is clear is that an incredibly consequential cannabis-related appellate decision is on the way, and it is going to be a fascinating read!

In Critical Dormant Commerce Clause Case, Second Circuit May Be Poised to Split the Baby, Not Split the Circuits

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