Keeping Cannabis Dormant

Senior Associate, Robert J. Marks

The Commerce Clause of the U.S. Constitution states that “Congress shall have Power … [t]o regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.” U.S. Const. Art. I, § 8, cl. 3. When the founders drafted this clause, I highly doubt that even they could have envisioned the far-reaching impacts of this seemingly straightforward grant of power. Believe it or not, the simple text of the Commerce Clause is now the principal reason that conditional licenses for recreational cannabis retail dispensaries are not being issued in multiple regions in New York State. The reason? Every Constitutional Law professor’s dream: the so-called “dormant” commerce clause.

Although not expressly written in the text of the Constitution, the Supreme Court of the United States has long interpreted the Commerce Clause to be not only an affirmative grant of authority to Congress to regulate interstate commerce but also a negative limitation on the power of the States to enact laws that place substantial burdens on interstate commerce. “This ‘negative’ aspect of the Commerce Clause prevents the States from adopting protectionist measures and thus preserves a national market for goods and services.” Tenn. Wine & Spirits Retailers Ass’n v. Thomas, 139 S. Ct. 2449, 2459 (2019); Ne. Patients Grp. v. United Cannabis Patients & Caregivers of Maine, 45 F.4th 542, 545–46 (1st Cir. 2022) (“Thus, the negative aspect of the Commerce Clause in and of itself protects interstate commerce from the evils of economic isolation and protectionism that state regulation otherwise could bring about.”) (Internal quotations omitted).

With the legalization of recreational cannabis in numerous states, these same states are faced with regulating the permitting process for what many consider a very profitable enterprise. Multiple states have prioritized granting permits to pre-existing state residents in those licensing regulations. This form of favoritism (or discrimination, depending on how you look at it) over “foreign” entities has, in turn, forced federal courts to wrestle with how the dormant Commerce Clause impacts states’ attempts to prioritize their residents.

Perhaps surprisingly, most federal courts have struck down or halted regulations favoring state residents and discriminating against non-state residents using the dormant Commerce Clause. In other words, these courts have found that the Commerce Clause quoted to start this article prohibits states from adopting these sorts of protectionist measures to ensure their residents are preferred over residents of other states. See, e.g.Ne. Patients Grp. v. United Cannabis Patients & Caregivers of Maine, 45 F.4th 542, 547 (1st Cir. 2022) (State of Maine); Variscite NY One, Inc. v. New York, No. 1:22-cv-1013 (GLS/DJS), 2022 WL 17257900, at *5–9 (N.D.N.Y. Nov. 10, 2022) (New York State); Toigo v. Dep’t of Health and Senior Servs., 549 F. Supp. 3d 985, 990–96 (W.D. Mo. 2021) (State of Missouri); Lowe v. City of Detroit, 544 F. Supp. 3d 804, 812–16 (E.D. Mich. 2021) (State of Michigan); Finch v. Treto, No. 22 C 1508, 2022 WL 2073572, at *12–20 (N.D. Ill. June 9, 2022) (State of Illinois).

In New York state, Plaintiff Variscite NY One, Inc. commenced an action on Sept. 26, 2022, against the State of New York and the New York State Office of Cannabis Management (OCM), pursuant to 42 U.S.C. § 1983, alleging a violation of the dormant Commerce Clause. Variscite NY One, Inc. v. New York, No. 122CV1013GLSDJS, 2022 WL 17257900, at *1 (N.D.N.Y. Nov. 10, 2022), reconsideration denied, No. 122CV1013GLSDJS, 2023 WL 1420662 (N.D.N.Y. Jan. 31, 2023). Specifically, Variscite took issue with the part of New York’s Cannabis Law that prioritizes applicants that have “a significant presence in New York state, either individually or by having a principal corporate location in the state; is incorporated or otherwise organized under the laws of this state; or a majority of the owners are residents of this state.” NY CANBS § 3. Plaintiff argued that the regulation’s favoritism of New York residents and discrimination against non-New York state residents violates the dormant commerce clause and directly discriminates against interstate commerce.

Variscite’s claim has so far been successful: Plaintiff’s initial motion for injunctive relief was granted, and the following geographic areas are currently enjoined from issuing any conditional adult-use retail dispensary licenses: Finger Lakes; Central New York; Western New York; Mid-Hudson; and Brooklyn.[1] New York State and OCM have appealed this decision to the United States Second Circuit Court of Appeals, and briefs are due in the next few months. It remains to be seen whether the courts will strike down OCM’s regulations as discriminatory or whether New York state will be permitted to prioritize its residents.

Interestingly, only three federal district courts have reached a different result when considering similar regulations (with one of those decisions being a California federal court that refused to rule directly on the issue: Peridot Tree, Inc. v. City of Sacramento, No. 2:22-CV-00289-KJM-DB, 2022 WL 10629241, at *11 (E.D. Cal. Oct. 18, 2022)). In 2021, a clever argument advanced in the Western District of Oklahoma won the day. The position taken by the state of Oklahoma was that the protections offered to interstate commerce by the dormant Commerce Clause are irrelevant because Congress considers cannabis an illegal drug by the Federal Controlled Substances Act. Stated differently, “it is impossible for there to be an interstate market in any good that, under federal law, is contraband throughout the country.” Ne. Patients Grp., 45 F.4th at 547. As the Oklahoma federal court found, “Plaintiff seeks equitable relief so that it may obtain a medical marijuana business license or own the majority of a company holding such a license. It seeks that relief to engage in activities that Congress has expressly declared criminal under federal law.” Original Invs., LLC v. State, 542 F. Supp. 3d 1230, 1235 (W.D. Okla. 2021).

The argument that the dormant Commerce Clause’s protection of interstate commerce has no bearing when the enterprise at issue is illegal at the federal level has been met with mixed results. In Maine, the First Circuit rejected that argument and found: “We note, too, that nothing in the record, in this case, indicates that, due to the CSA, there is no interstate market in medical marijuana. The prohibition that Maine’s Medical Marijuana Act seeks to impose on out-of-state actors entering that very market reflects the reality that the market continues to operate.” Ne. Patients Grp., 45 F.4th at 547 (noting that “it is possible for an interstate commercial market in contraband to exist, as the persistence of interstate black markets of various kinds all too clearly demonstrates”).

Nonetheless, in the most recent case, the Western District of the State of Washington denied a dormant Commerce Clause challenge to state cannabis regulations. Brinkmeyer v. Washington State Liquor & Cannabis Bd., No. C20-5661 BHS, 2023 WL 1798173 (W.D. Wash. Feb. 7, 2023). That court also relied on the fact that cannabis is illegal on the federal level. Specifically, the Washington federal court found “[c]onceptually, the dormant Commerce Clause exists to preserve a national market for competition undisturbed by preferential advantages conferred by a State upon its residents or resident competitors. In other words, it is designed to protect interstate commerce. No party, in this case, suggests that citizens have a federal statutory or constitutional property right to cannabis. At the same time, it remains federally illegal. They do not.” Id. at *10 (internal citations and quotations omitted). Put simply, “citizens do not have a legal interest in participating in a federally illegal market,” and consequently, “the dormant Commerce Clause can[not] be read to protect illegal interstate commerce.” Id. There is no doubt that states across the U.S. have taken notice of this avenue to avoid the dormant Commerce Clause, and the argument will likely take center stage at the appellate level moving forward.

Whether the dormant commerce clause can continue to halt the issuance of adult-use retail dispensary licenses in New York and across the U.S. remains to be seen. What is clear, however, is that the impending decision to be made by the Second Circuit Court of Appeals overseeing the New York state litigation will dramatically impact adult-use retail cannabis licenses in New York and possibly the U.S. Supreme Court’s interest in deciding this issue. Either way, the current winner is undoubtedly the Constitutional Law professors who now have fresh content on an otherwise “dormant” subject matter.

Robert Marks is a Senior Associate in the Litigation Department at Boylan Code LLP, focusing his practice on Municipalities and Commercial Litigation.

This article was published in The Daily Record and Talk of the Towns & Topics Magazine

[1] Variscite’s initial victory is especially significant because in order to obtain an injunction, the Plaintiff must have demonstrated to the Court “a clear or substantial likelihood of success on the merits.” Variscite NY One, Inc., 2022 WL 17257900, at *5.