(September 10, 2025) - Alexander Malyshev and Sarah Ganley of Carter Ledyard & Milburn LLP discuss a court decision holding that the Dormant Commerce Clause applies to the recreational cannabis market, thus prohibiting New York from privileging its residents when awarding licenses to cannabis businesses.
As readers of this column know, New York's Adult-Use licensing scheme has experienced numerous challenges, both operationally and in court. Last month, the 2nd U.S. Circuit Court of Appeals added violations of the Dormant Commerce Clause ("DCC") to that list.
In Variscite NY Four, LLC v. New York State Cannabis Control Board, it held that the DCC — a constitutional doctrine prohibiting states from privileging their own citizens — applies to the recreational cannabis market, thus prohibiting New York from privileging its own residents when awarding licenses to cannabis businesses.
This decision follows the 1st U.S. Circuit Court of Appeals' prior decision in Northeast Patients Group v. United Cannabis Patients & Caregivers of Me., 45 F.4th 542 (1st Cir. 2022), which struck down Maine's residency requirement for officers and directors of medical marijuana dispensaries under the DCC.
In Variscite, a split-panel held that New York's Adult-Use cannabis licensing regime violates the DCC by prioritizing the review of applications for retail cannabis licenses submitted by applicants with a past New York marijuana conviction (or those who have a close relative with such a conviction) over the applications of similarly situated applicants with out-of-state convictions. Finding it "fair to assume" that most New York marijuana offenders are New Yorkers, the court concluded this system is a protectionist measure that unconstitutionally favors in-state applicants over others.
Although not surprising in light of Northeast Patients Group, the Variscite decision underscores a growing judicial consensus that the DCC constrains state cannabis regulations to the same extent as any other industry, possibly sending regulators back to the drawing board.
New York's licensing framework
Since legalizing recreational adult use cannabis in 2021, New York has instituted two separate application programs for retail cannabis dispensary licenses.
First, from August through September 2022, New York regulators accepted applications under the Conditional Adult-Use Retail Dispensary ("CAURD") Application Program, which required qualifying applicants to have a significant presence in (or be a resident of) the state.
CAURD's New York presence or residency requirement has been challenged in at least two separate litigations, both of which resulted in preliminary injunctions restraining the program. See Variscite NY One, Inc. v. New York, 640 F. Supp. 3d 232, 234 (N.D.N.Y. 2022); Fiore v. N.Y. State Cannabis Control Bd., (Sup. Ct. N.Y. Co. Aug. 18, 2023).
Seemingly chastened, in September 2023, New York adopted regulations for a new application program that would be open to both New Yorkers and out-of-staters: the Adult-Use application program. This program divided applicants into two pools — a November Pool and a December Pool — with a separate number of licenses available in each.
The November Pool was open to applicants who could demonstrate proof of control over a retail location prior to Nov. 17, 2023 (when the pool closed). All other applicants were part of the December Pool. So far, so good.
To determine the order of review for the limited number of licenses available, regulators randomly assigned applicants positions in the review queues for each pool.
The Adult-Use program gave certain applications "Extra Priority" if an applicant or its majority owner (a) is a member of a community disproportionately impacted by cannabis prohibition, (b) has an income lower than 80% of the median income of the county in which the applicant resides, and (c) was convicted of a marijuana-related offense under New York law (or has a close relative with such a conviction).
Applicants who met these criteria were assigned three random positions in the review queues, effectively giving them triple the chance at an early slot. This is where the new program ran afoul of the DCC.
The 2nd Circuit's decision
The Variscite plaintiffs filed suit on Dec. 18, 2023, in the Northern District of New York alleging the Adult-Use program preferences New Yorkers in violation of the DCC. Three days later, plaintiffs moved for a preliminary injunction stopping New York from issuing Adult-Use licenses and additional CAURD licenses. The district court denied plaintiffs' motion, finding the DCC did not apply in this context because cannabis is federally illegal.
This finding was squarely rejected on appeal. While cannabis is listed as a Schedule I controlled substance under the Controlled Substances Act, the court emphasized that Congress had not "clearly authorized" states to enact protectionist licensing schemes. In other words, state-level legalization does not give states carte blanche to discriminate against nonresidents in awarding cannabis licenses.
The court found that conditioning licensing preference on New York-specific convictions was a proxy for favoring New Yorkers, because most individuals with New York marijuana convictions were residents of the state when convicted. Thus, the Adult-Use program's Extra Priority scheme effectively excluded out-of-state offenders with similar histories. This amounted to facial discrimination under the DCC, triggering strict scrutiny — which New York could not survive.
The 2nd Circuit vacated the district court's denial of a preliminary injunction and remanded, holding that plaintiffs were likely to succeed on their DCC claim regarding the Adult-Use program's Extra Priority rule.
Key takeaways for the cannabis industry
The 2nd Circuit's decision underscores a growing judicial consensus that the DCC constrains state cannabis regulations to the same extent as in other industries, unless Congress unmistakably authorizes protectionism. The decision is almost certain to have a significant impact on the industry moving forward.
Many states — including Washington, California, Maryland, and Rhode Island — have adopted licensing schemes that prioritize local residents or those with local cannabis convictions, rendering them vulnerable to challenges based on Variscite. States may need to restructure social equity programs to focus on geography-neutral measures (e.g., income levels, and past cannabis convictions regardless of jurisdiction).
New York has been a case study in how private litigants can derail a regulatory agenda that seeks to achieve the regulators' view of social equity without sufficiently considering the legal implications. Other equity-focused licensing systems are now ripe targets for lawsuits.
Plaintiffs in states such as Maine and Missouri have already challenged residency rules with some success. Moreover, similar appeals are currently pending in the 1st and 9th Circuits. See Jensen v. R.I. Cannabis Control Commission, et al., No. 25-1132 (1st Cir.); Peridot Tree WA Inc. v. Wash. State Liquor & Cannabis Control Bd., No. 24-3481 (9th Cir.).
However, on Sept. 2, the 4th U.S. Circuit Court of Appeals ruled against a California resident who argued that a social equity requirement for Maryland's retail cannabis market discriminates against out-of-state residents by favoring applicants who have attended a four-year university in Maryland for at least two years, where at least 40% of the students are eligible for Pell Grants.
The three-judge panel found this requirement to be non-discriminatory, reasoning that attendance at a qualifying university does not require Maryland residency. See Jensen v. Md. Cannabis Admin. et al., (4th Cir. Sept. 2, 2025).
Variscite provides a powerful new precedent in the influential 2nd Circuit. States should anticipate and prepare for increased litigation (especially if other circuit courts follow the 1st and 2nd Circuits' lead).
Originally published by Thomson Reuters and Westlaw Today.
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