By: Dale Schafer Esq.
On December 18, 2023, two cannabis companies seeking retail licenses in New York, filed a Federal lawsuit in the Northern District of New York asking the court to find the residency requirements for “extra priority” in the application process to be an unconstitutional violation of the Dormant Commerce Clause. Variscites Four, LLC and Variscites Five, LLC (Plaintiffs), filed the federal lawsuit against the New York State Cannabis Control Board (Board), New York Office of Cannabis Management (Management Office), Tremaine Wright, the Chairwomen of the Board, and Chris Wright, Executive Officer of the Office of Cannabis Management.
In the complaint, the Plaintiffs allege that the New York regulations enable the Board to determine the application process. A section of the regulations authorizes “extra priority” in granting licenses to residents of communities disproportionately effected by poverty and cannabis arrests. There is a residency requirement of five years before the age of eighteen or an aggregate total of seven years, in the community. The Plaintiffs majority owner is a resident of an effected community in California and has a California cannabis conviction. When the Plaintiffs attempted to file their application on the New York portal, no applications would be accepted unless the residency and conviction were in New York state. Plaintiffs allege the New York residency and conviction requirements violate the Dormant Commerce Clause. The Dormant Commerce Clause prohibits local laws that discriminate against interstate commerce on their face or that have the effect of discriminating against interstate commerce.
In this case, the regulations do not, on their face, appear to discriminate against interstate commerce. However, the refusal of the system to accept applications from persons with out of state qualifying conditions has the effect of discriminating against interstate commerce from out of state applicants. Under our dormant Commerce Clause cases, if a state law discriminates against out-of-state goods or nonresident economic actors, the law can be sustained only on a showing that it is narrowly tailored to “ ‘advanc[e] a legitimate local purpose.’ ” Department of Revenue of Ky. v. Davis, 553 U.S. 328, 338, 128 S.Ct. 1801, 170 L.Ed.2d 685 (2008). See also, e.g., Oregon Waste Systems, Inc. v. Department of Environmental Quality of Ore., 511 U.S. 93, 100–101, 114 S.Ct. 1345, 128 L.Ed.2d 13 (1994); Maine v. Taylor, 477 U.S. 131, 138, 106 S.Ct. 2440, 91 L.Ed.2d 110 (1986).
What is the Dormant Commerce Clause?
Under the US Constitution, the Federal Government has the express and exclusive power to regulate commerce amongst the several states. This provision grants the federal government positive power to enact laws that control and regulate interstate commerce. However, it has long been held that there is an inherent negative power that authorizes the courts to prohibit state laws and actions that unduly restrict interstate commerce. See, e.g.; Philadelphia v. New Jersey, 437 U.S. 617, 623–624, 98 S.Ct. 2531 (1978). A significant reason for enacting our Federal Constitution was the battles between the states under the Articles of Confederation that resulted in protective taxes and regulations that prevented the free flow of commerce between the states. Accordingly, state laws that allow only state residents to apply for a commercial license restrict out of state residents from equally competing for the commercial opportunity.
One of the driving forces in the rollout of the commercial cannabis industry has been the desire to provide “social equity” to persons effected by the war against cannabis. These efforts to right past wrongs have commonly come in the nature of preference for persons with past cannabis convictions and persons that lived in communities disproportionately effected by the war on drugs and poverty. These efforts to provide equity have come by way of preferential treatment in the application process. This “preference” has been routinely carried out by giving points for certain criteria, like what is seen in New York. However, refusing to accept an application from a person that qualifies for the preference because of a conviction or living out of state, seems problematic here. Although the regulations do not state only New York residents or convictions are qualified, the de facto refusal to accept otherwise qualified out of state residents appears to unduly restrict interstate commerce.
I want to emphasize that this is only a complaint with allegations. When the state responds we will revisit this case to discuss the viability of any position they might take. This is not a case, like Illinois, where the statute contains a residency requirement. However, the effect is similar. Additionally, the efforts to bring equity to the cannabis industry will require careful crafting since laws are not allowed to treat an identifiable, protected class, like people of color, differently without much litigation over past treatment and the necessity for current preferential treatment. Standby, this is an evolving area of the cannabis industry and the Plaintiffs have asked the judge to stop all new licenses in New York from being granted until this is resolved. Is it any wonder that so many cannabis programs are circling the drain?
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