The expansion of marijuana legalization in the United States has primarily focused on the actors that have been integral to the creation and implementation of state policies. This has primarily included the roles of state legislatures and executive administrations in the enactment of laws and regulations legalizing marijuana and governing its sale, as well as the voters in states that have implemented marijuana legalization through an initiative and referendum process. But as marijuana markets continue to mature, the judiciary has become more instrumental in shaping the marijuana landscape. Recent court cases and pending litigation have the potential to dramatically reshape the industry and how it is regulated. In this blog, three areas of recent jurisprudence in marijuana policy—residency requirements, interstate commerce, and social equity programs—are examined. These cases highlight the increasingly prominent role that the judiciary is taking in shaping the marijuana industry.
One area where the courts have been called upon to adjudicate has been state residency requirements. Many states tie license eligibility to individuals or entities that are either state residents or who have a “significant presence” in the state. These residency requirements have recently been challenged in three states—Maine, Washington, and New York—based on an assertion that the respective residency requirements violate the Dormant Commerce Clause. The court’s decisions in these cases have reflected very different interpretations of the law, however, and could be setting up a potential showdown at the Supreme Court.
What Is the Dormant Commerce Clause?
The Dormant Commerce Clause is a legal doctrine that derives from the Commerce Clause in Article I, Section 8, Clause 3 of the US Constitution. The Commerce Clause grants Congress the power to “regulate Commerce with foreign Nations, and among the several States, and with Indian Tribes.” The Dormant Commerce Clause is not explicitly mentioned in the Constitution; rather the doctrine originated from legal interpretations made first by the Supreme Court of Chief Justice John Marshall in cases such as Gibbons v. Ogden (1824) and Wilson v. Black-Bird Creek Marsh Co. (1829). The Dormant Commerce Clause prohibits states from passing protectionist legislation that unduly burdens or discriminates against interstate commerce. It is referred to as “dormant” as this prohibition on states exists even when Congress does not act (or is dormant) in regulating the commerce activity in question.
In 1970, the Supreme Court, in a unanimous decision, established a two-pronged test to determine if a state regulation is in violation of the dormant Commerce Clause (see Pike v Bruce Church, Inc.). First, a state law or regulation is automatically unconstitutional if its purpose is economic protectionism, or the favoring of in-state economic interest over out-of-state interests. However, if the purpose of the law in question is not to discriminate against out-of-state commerce, but still imposes an incidental burden on interstate commerce, a balancing test will be employed to see if the legitimate government interests outweigh the burden imposed. In other words, “state statutes that clearly discriminate against interstate commerce are routinely struck down, unless the discrimination is demonstrably justified by a valid factor unrelated to economic protectionism.”
How does the Supreme Court’s two-prong approach impact states’ adoption of marijuana policy? Below are several examples of the real-world implications states face in a complex constitutional framework.
In 2020, the medical marijuana company Wellness Connection of Maine filed a challenge to the 2009 Maine Medical Marijuana Act that created the commercial medical marijuana program within the state in Northeast Patients Group et al. v. United Cannabis Patients and Caregivers of Maine. One condition of the law was that for a dispensary to be able to enter the state’s medical market, all management and ownership interests of the dispensary had to be residents of Maine. Wellness Connection met the necessary eligibility criteria and became the largest medical marijuana company in the state. However, Wellness Connections was prohibited from selling the company to High Street Capital Partners as the latter did not meet the state’s residency requirements. Wellness Connection and High Street Capital Partners alleged in a lawsuit that the residency requirements for the state medical marijuana market were protectionist and served no other governmental purpose than to protect Maine companies from competition and should be declared unconstitutional as a violation of the Dormant Commerce Clause. The state argued that the Dormant Commerce Clause was not applicable in this case as the federal government had made marijuana illegal at the federal level with the passage of the Controlled Substances Act of 1970 (CSA). The state argued that “Congress has eliminated the national market for marijuana and thus there is no national market with which Maine can interfere.” Previously, the state had eliminated residency requirements for licenses for adult-use marijuana dispensaries after a legal challenge was brought, also by Wellness Connection.
Both the US District Court and the US Court of Appeals for the First Circuit agreed with Wellness Connection that Maine’s residency requirement for medical dispensary licensure was a violation of the Dormant Commerce Clause and was struck down. The majority of the First Circuit was unpersuaded that the federal illegality of marijuana resulted in Maine’s state medical marijuana market being removed from the restraints of the Dormant Commerce Clause. Rather, Congress had in fact acknowledged the existence of state marijuana markets with the yearly passage of the Rohrabacher-Farr Amendment, which prohibits the US Department of Justice from using funds to interfere with well-regulated state medical marijuana markets.
In the majority opinion of the US Court of Appeals for the First Circuit, the Honorable Nancy Torresen wrote, “This congressional action in the wake of the CSA reflects that Congress contemplates both that an interstate market in medical marijuana may exist that is free from federal criminal enforcement and that, if so, this interstate market may be subject to state regulation.” Finding the Dormant Commerce Clause applicable, Maine’s residency requirement was viewed as protectionist with the sole purpose of benefiting medical marijuana companies run by state residents at the expense of out-of-state companies and, therefore, could not stand.
A recent Washington State case, Brinkmeyer v Washington State Liquor & Cannabis Board, mirrored the facts and arguments in the Maine case. Todd Brinkmeyer, a resident of Idaho, sought to become a partial owner of an existing adult-use marijuana dispensary in Washington. However, the state’s marijuana regulatory statute prohibits anyone from being granted a license that has not lawfully resided in the state for at least six months prior to application. Brinkmeyer had been approved several times by the state to serve as a debt financer to the dispensary, which does not require a license or have any residency requirements. The arguments of the litigants were in keeping with the Maine lawsuit; “Brinkmeyer argues, generally, that the state’s residency requirements are unconstitutional because they discriminate, without justification, against out-of-state,” while the state “argue[d] that at least parts of the United States Constitution do not apply to the state’s cannabis market because no federally legal market exists and that, even if the Constitution does apply, the state is justified in restricting the market to in-state citizens given the fact that cannabis remains federally illegal.”
However, unlike the Maine case, the arguments of Washington were found to be more persuasive by the US District Court of the Western District of Washington, and the residency requirement was permitted to remain in place. In March 2023, the district court found that the Dormant Commerce Clause could not be found to be applicable to federally illegal commerce—“It is not clear to this Court how the Dormant Commerce Clause can be read to protect illegal interstate commerce. The Supremacy Clause, preemption, general principles of federalism, and common sense suggest it does not.” The district court also resolved that the residency requirement implemented by Washington was in keeping with the intent of Congress in passing the Controlled Substances Act. “Although Washington’s “legalization” of cannabis certainly does not align with Congress’s intent, the residency requirements do. The residency requirements attempt to prevent any interstate commerce in cannabis and to prevent cannabis from Washington from moving into states where it remains illegal, like Idaho.” Brinkmeyer filed an appeal with the United States Court of Appeals for the Ninth Circuit but withdrew the appeal in April 2023.
The rulings in the Maine and Washington cases present two different ways of interpreting the applicability of the Dormant Commerce Clause on a federally illegal market.
Unlike the previous cases discussed, the challenge to New York’s residency requirement (Variscite NY One, Inc. v. State of New York et al.) is still pending. The requirements promulgated by the New York State Office of Cannabis Management (OCM) for Conditional Adult-Use Retail Dispensary (CAURD) licenses had several residency requirements, including candidates needing to have a previous marijuana-related offense in New York State prior to legalization and the ability to demonstrate a significant presence in the state. Variscite NY One, Inc., was denied a license as its majority owner had a previous cannabis conviction in Michigan, rather than New York, and did not have a significant connection to New York. As in the other cases, Variscite relies on the Dormant Commerce Clause as part of their challenge to New York residency requirements, arguing that the licensing requirements are discriminatory to out-of-state candidates and that the state must demonstrate that the regulations are narrowly tailored to advance a legitimate state interest. While the US District Court has not made a ruling in this case, the court stated that Variscite “is likely to succeed on the merits of their claim.”
Because of this, and the fact that at the time of the filing, OCM had yet to issue any licenses, in November 2022, the district court was willing to implement an injunction on the issuing of CAURD licenses in the five regions where Variscite identified they might locate a dispensary (Central New York, Brooklyn, Finger Lakes, Western New York, and Mid-Hudson), further slowing the roll out of the adult-use marijuana industry in a significant portion of the state. The state appealed the injunction and, in March 2023, the United States Court of Appeals for the Second Circuit further narrowed the injunction to only be applicable to the Finger Lakes region, as that was Varscite’s first choice for a dispensary location.
The rulings in the Maine and Washington cases present two different ways of interpreting the applicability of the Dormant Commerce Clause on a federally illegal market. As more of these challenges are brought forward—and if these various schools of thought on the Dormant Commerce Clause reach other circuit courts—the Supreme Court of the United States may be asked to weigh in to provide a decision. Until then, residency requirements may be struck down in some states and permitted in others.
A legal challenge in Oregon also relies on the Dormant Commerce Clause to try and overturn the state’s export ban on marijuana. Due to the federal prohibition of marijuana, every state that has legalized medical or adult-use marijuana has limited its sale to only within the state and has forbidden its sale or transfer across state lines. In Jefferson Packing House, LLC v. Tina Kotek et al., a marijuana wholesaler in Oregon argued that the export ban negatively impacted their business because it “drastically increases its costs by preventing it from taking advantage of economies of scale” and “significantly limit[s] the universe of potential customers it can reach and prevents it from increasing its ability to profit.” Jefferson Packing House relies on the same argument as Patients Group et al. v. United Cannabis Patients and Caregivers of Maine to assert that the Dormant Commerce Clause has been violated by the state’s ban.
Oregon, however, asserted that the case should be dismissed since the Dormant Commerce Clause does not apply because making marijuana illegal under federal law exorcised Congress’ Commerce Clause powers. Additionally, even if the state export ban was overturned, the federal ban would still be in place, meaning the remedy sought by the plaintiff—overturning of Oregon’s export ban—would not alleviate the injury cited.
This case is still pending, but the decision could have far-reaching implications. If the state’s export ban is struck down, this would reinforce that the Dormant Commerce Clause should apply to a federal illegal market. It may also lead to a bigger showdown with the federal government if state laws change to allow for the export of marijuana to other states. Would the federal government intervene or continue its general attitude of laissez-faire when it comes to marijuana enforcement?
Social Equity Program
In addition to the legal challenge to New York’s residency requirements for licensing, the creation of the Conditional Adult-Use Retail Dispensary licenses, in general, is subject to a separate legal challenge. In July 2022, the Office of Cannabis Management approved the regulations for CAURD licenses. These first dispensary licenses would be limited to justice-involved individuals and their immediate families that had a cannabis-related offense in the state and had experience owning and operating a qualifying business in the state of New York. Nonprofits that have “a clear mission, an organizational goal, or a history of providing services to individuals who have been (or currently are) involved in the criminal justice system” were also eligible. Candidates who did not meet these criteria would not be eligible for a dispensary license.
While the impacts of this decision would be limited to only New York, given that it is the only state that has these particular licensing requirements, it could upend one of the largest marijuana markets in the country.
In Coalition for Access to Regulated & Safe Cannabis v. New York State Cannabis Control Board et al., the plaintiffs allege that the OCM violated the separation of powers doctrine of the New York State Constitution and engaged in legislative policymaking by implementing a new social equity license beyond those explicitly mandated by the Marihuana Regulation and Taxation Act (MRTA) passed by the state legislature and signed by the governor on March 31, 2021. Coalition for Access to Regulated & Safe Cannabis argued that the language of MRTA sets the goals for OCM and the Cannabis Control Board (CCB) to issue “fifty percent of adult-use cannabis licenses to social and economic equity applicants and to prioritize the consideration of applicants who (i) qualify as minority-owned businesses, women-owned businesses, distressed farmers, and service-disabled veterans, or (ii) are from communities disproportionally impacted by cannabis prohibition” and that “that the initial adult-use cannabis retail dispensary license application period shall be opened for all applicants at the same time.” By granting 100 percent (rather than 50 percent) of current adult-use marijuana dispensary licenses to social equity candidates and deferring the rollout of additional dispensary licenses to other candidates, rather than issuing them at the same time, the Coalition for Access to Regulated & Safe Cannabis believes that a violation of the MRTA occurred. Plaintiffs also accuse OCM of a dereliction of duty in cracking down on the illicit marijuana market in New York State, which negatively impacts both the goals of the MRTA and the medical marijuana dispensaries in the state. The language of the MRTA grants OCM and CCB several enforcement powers: they can seek a financial penalty, refer violations to the Attorney General’s office, or seek a civil injunction. Though the case is still pending, the Coalition for Access to Regulated & Safe Cannabis is seeking a declaration that the CAURD licensing is unconstitutional, the adult-use dispensary licensing process should be opened to all applicants immediately, and that OCM be compelled to use their enforcement power to limit the illicit marijuana market in New York.
While the impacts of this decision would be limited to only New York, given that it is the only state that has these particular licensing requirements, it could upend one of the largest marijuana markets in the country. The adult-use marijuana market in the state would increase significantly if licensing was opened up to all interested parties, but those that were initially granted CAURD licenses would no longer have the advantage that they were expecting by being the early entrants to the market.
These cases illustrate the role that the judiciary can play in shaping the maturing marijuana market in the United States. Rulings on residency requirements, interstate commerce, and social equity provisions will not only impact the states that have already legalized but may set up additional conflicts with the federal government as the complexities of legalizing marijuana in the shadow of a federal prohibition continue to take shape.
ABOUT THE AUTHOR
Heather Trela is director of operations and fellow at the Rockefeller Institute of Government