A federal appellate court has ruled that a New York cannabis licensing rule favoring in-state residents is unconstitutional, because it discriminates against applicants residing out-of-state. We have been tracking this case for the past couple of years — see our prior posts here and here.
This decision by the Second Circuit Court of Appeals is the first to apply the Dormant Commerce Clause to adult use cannabis — and, in combination with an earlier decision involving Maine's medical cannabis program, suggests a trend toward rejection of all protectionist state cannabis laws despite the federal illegality of marijuana sales and use. The decision was a long time coming: we speculated as far back as 2015 on this blog that the Dormant Commerce Clause could be used to upend residency requirements for state cannabis programs.
Here, the Second Circuit decided that one of New York State's cannabis dispensary application pools could be challenged under the U.S. Constitution's Dormant Commerce Clause, because it favored applicants convicted in New York of marijuana-related crimes prior to legalization in 2021. The court reasoned that it was highly likely that people convicted of crimes in New York were residents of New York. Such applicants received better odds of selection from the pool. This discriminated against residents of other states that wanted to acquire a cannabis dispensary license in New York, including the California-based plaintiff.
The Dormant Commerce Clause has been cited in many lawsuits seeking to overturn state and local laws that require cannabis business applicants to reside in the state or community. Many of these legal challenges by non-resident applicants have failed – primarily based on the government's argument that the Constitution does not protect illicit businesses. Although cannabis is now legal for medical or recreational use in a majority of states, it remains illegal under the federal Controlled Substances Act ("CSA").
The Second Circuit, in a 2-1 decision, held that simply because the CSA was enacted to eradicate the interstate cannabis market, it did not create "a license for states to incubate intrastate markets in the same product." Giving preferences to New Yorkers is a protectionist measure that is forbidden by the Commerce Clause, the Second Circuit held.
The Commerce Clause explicitly gives Congress the power to regulate commerce among the states. But the Clause has been interpreted as also forbidding the enforcement of state-enacted economic regulations in situations where Congress has not enacted laws regarding the issue. The U.S. Supreme Court has held that "state laws offend the Commerce Clause when they seek to build up domestic [in-state] commerce through burdens upon the industry and business of other states." Residents of a state are not entitled to preferential advantages over non-resident competitors.
The Second Circuit acknowledged the "irony" in enforcing the Commerce Clause "in the context of illicit markets; but the objective should not be conflated with the rule itself." If illicit markets were exempt from the Dormant Commerce Clause, "states would then be free today to bake in advantages for their residents should Congress later legalize the market." Congress could, if it wanted, give states the power to restrict certain interstate activities – such as exempting cannabis business ownership from the Commerce Clause – but it has not. "[S]tate protectionism is forbidden unless Congress says otherwise – and Congress has not said otherwise."
The Court rejected New York State's argument that Congress has authorized protectionist state measures relating to marijuana because cannabis is a Schedule I drug in the CSA. The CSA's ban on interstate marijuana trafficking and New York's licensing scheme do not correspond, however. New York's "preference [for New Yorkers when issuing dispensary licenses . . . does not inhibit interstate marijuana traffic; it creates an incentive to institutionalize the marijuana industry and help it flourish."
New York's attempt to avoid obvious residency requirements by prioritizing those with in-state marijuana convictions was deemed an unconstitutional proxy for state residency preferences. The Court was also unimpressed by New York's argument that it was advancing "restorative justice and social equity goals," because there were ways to do this without favoring New Yorkers over non-residents.
The Second Circuit's decision in Variscite NY Four, LLC v. New York State Cannabis Control Board, Case No. 24-384-cv, follows a 2022 decision by the First Circuit Court of Appeals involving regulation of medical marijuana dispensaries, Northeast Patients Group v. United Cannabis Patients & Caregivers of Maine, 45 F.4th 542 (1st Cir. 2022). Expect more challenges to follow.
Federal Appeals Court Rejects Preferences For In-State Cannabis Applicants
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