Takeaways
- The Second Circuit invalidated New York's cannabis licensing rules for discriminating against out-of-state applicants.
- The Court ruled that social equity goals cannot justify residency-based advantages.
- This Decision adds to a growing circuit split that could reach the U.S. Supreme Court.
On Tuesday, August 12, the U.S. Court of Appeals for the Second Circuit became the second federal appellate court to invalidate a state cannabis licensure program that discriminates against out-of-state residents.
This week's decision in Variscite NY Four v. New York State Cannabis Board comes almost three years to the day after the First Circuit decided Northeast Patients Group v. Maine Dept. of Administrative and Financial Services. In that case, the court invalidated Maine's explicit requirement that all owners of cannabis licensees had to be Maine residents. In Variscite NY Four, the court invalidated New York's scheme for providing an advantage that effectively favored New York residents.
New York's social equity program does not require licensees to have New York owners. Instead, it boosts the chances of cannabis license applicants to be considered early in New York's queue if they meet social equity requirements. Those requirements are that the applicant or a majority of its owners be: (1) members of communities disproportionately impacted by cannabis prohibition, (2) fall below certain income thresholds, and (3) either have a New York marijuana conviction or a relative who has one. (Michigan readers will instantly see parallels with the social equity programs in Grand Rapids and Detroit.)
Applicants for New York licenses, who met the first two criteria but had California instead of New York marijuana convictions, sued the State's cannabis regulators. The applicants argued that the licensing process violated the U.S. Constitution's dormant Commerce Clause because it effectively discriminated against out-of-state applicants.
The Second Circuit agreed. The Court explained that laws that provide preference to in-state economic interests are discriminatory, and that discrimination can be found on the face of the law (e.g., Maine), or when the law has a discriminatory purpose or effect. Laws discriminating against interstate commerce are automatically invalid unless the law is the only means by which the government can advance a legitimate local purpose. Although New York argued that it was advancing the lawful purpose of promoting "restorative justice and social equity goals," the Court rejected the notion that these goals could be accomplished only by benefits that disproportionately favored New Yorkers.
In addition to upholding the substantive challenge to the New York scheme, the Court rejected the State's argument that the federal illegality of marijuana meant the federal courts could not address New York's discrimination. The Court also found that the plaintiffs had standing to challenge improper actions in a first round of licensing, even though they didn't apply until the second round. The Court explained that the improper award of licenses in the first round had the effect of reducing the chances of non-New York applicants in the second round.
The take-away? Some state and federal courts (e.g., Michigan) have upheld various preferences not based on actual residency. The Second Circuit, however, scrutinized justifications put forth by government attorneys and looked beyond the face of the law to see if it disfavored out-of-state applicants. As more federal appellate courts reach different results in challenges to state cannabis licensing criteria, the developing circuit split could entice the U.S. Supreme Court to take on the issue.
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