Business
Judge Puts New York Dispensary Licenses On Pause On Dormant Commerce Clause Grounds
While this preliminary injunction could be overturned and is limited to five geographic areas, it does not bode well for New York’s timeline.
On November 10, 2022, a federal judge temporarily stopped the Office of Cannabis Management (OCM) from issuing conditional adult-use retail dispensary (CAURD) licenses in certain parts of New York. The reason: the CAURD application contained NY residency requirements that may violate the U.S. Constitution (specifically, a court-created doctrine called the “dormant commerce clause”). A copy of the full decision is available here.
CAURD LICENSES
OCM plans to issue 150 CAURD licenses to qualifying applicants. A CAURD licensee will be able to operate an adult-use recreational cannabis retail store in the state of New York. The CAURD application window closed in September, but OCM has not issued any CAURD licenses yet.
OCM divided the state of New York into regions and plans to issue a specific number of CAURD licenses in each region. In their applications, CAURD applicants ranked their top 5 regions.
CAURD APPLICATION REQUIREMENTS
The CAURD Regulations include New York residency requirements. For example, an applicant must demonstrate “a significant presence in New York State, either individually or by having a principal corporate location in the state.” Also, qualifying CAURD applicant (or their parent, guardian, spouse, child, or dependent) must also have been “convicted of a marihuana-related offense in New York State” before March 31, 2021 (There are other NY-specific CAURD requirements, but we don’t need to go through them all here.)
VARISCITE LAWSUIT
CAURD applicant Variscite NY One, Inc. is 51% owned by an individual with a cannabis conviction in Michigan (and not New York). Variscite selected as its five preferred regions the Finger Lakes, Central New York, Western New York, Mid-Hudson, and Brooklyn.
In September, Variscite sued the state of New York on grounds that the CAURD rules are unconstitutional. Specifically, Variscite claims that the CAURD rules violate the “dormant commerce clause,” a court-created legal doctrine that is grounded in the Constitution’s Commerce Clause.
In a previous Green Light Law Blog post, we summarized the dormant commerce clause as follows:
The U.S. Constitution contains a passage, commonly referred to as the “Commerce Clause,” which provides that “Congress shall have Power . . . to regulate Commerce . . . among the several States[.]” The U.S. Supreme Court has long interpreted this clause to include a corollary or “dormant” Commerce Clause which has the effect of prohibiting states from enacting laws inhibiting trade among the states.
In a recent case, Tennessee Wine and Spirits Retailers Association v. Thomas, decided in 2019, SCOTUS invalidated a two-year residency requirement for Tennessee retail liquor stores. In applying the DCC to case at hand, the Court wrote “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 advance a legitimate local purpose.” SCOTUS determined that “Tennessee’s 2-year durational-residency requirement plainly favors Tennesseans over nonresidents, and found that the law was not “narrowly tailored” to advance a legitimate local purpose and invalidated Tennessee’s residency requirement as unconstitutional.
Put simply, the Constitution grants the federal government jurisdiction over any interstate commerce and if a state law or regulation prohibits or prevents interstate commerce by favoring its residents over the residents of other states, it violates the Constitution.
COURT FINDS NY RESIDENCY REQUIREMENT LIKELY UNCONSTITUTIONAL
In a 29-page decision, the Honorable Gary L. Sharpe of the United States District Court for the Northern District of New York granted Variscite’s motion for a preliminary injunction. Variscite essentially asked the court to stop OCM from issuing CAURD licenses in five geographic areas where it applied, while the lawsuit was pending.
Court’s do not issue preliminary injunctions lightly because it requires the court to act before each party has the opportunity to make its case at trial. A plaintiff seeking an injunction must meet several criteria, including their likelihood of success on the merits. As such, the court’s analysis in this case began with the question of whether Variscite was likely to succeed on the merits of its dormant commerce clause argument.
In evaluating a dormant commerce clause challenge, a court first evaluates whether the challenged law discriminates against interstate commerce in favor of intrastate commerce or whether it regulates evenhandedly. The court determined that requiring CAURD applicants to demonstrate a significant presence in New York will have a “discriminatory effect on out-of-state residents.”
When a law or regulation has such an effect, it can only survive a legal challenge if it is “narrowly tailored to advance a legitimate local purpose.” It turns out that this was all that was required because, according to the court, OCM “not even attempt” to explain how its rules are narrowly tailored. When asked directly by the court, “defendants offered no cogent response.”
This is surprising. Whether or not you agree with OCM’s CAURD requirements, they should be able to at least develop several arguments as to WHY those regulations are narrowly tailored so not to violate the dormant commerce clause. After establishing a likelihood to succeed on the merits, Variscite succeeded in meeting the other criteria necessary to obtain a preliminary injunction in the geographic areas it applied.
BOTTOM LINE
New York regulators have made it a priority to issue CAURD licenses before the end of the year. While this preliminary injunction could be overturned and is limited to five geographic areas, it does not bode well for New York’s timeline. It could also open the door to other challenges to New York’s cannabis residency requirements.
We’ll continue to monitor this case and report as it develops.
New Mexico regulators fined a cannabis operator nearly $300,000 and revoked its license after the company allegedly created fake reports in the state’s traceability software.
The New Mexico Cannabis Control Division (CCD) accused marijuana manufacturer and retailer Golden Roots of 11 violations, according to Albuquerque Business First.
Golden Roots operates the The Cannabis Revolution Dispensary.
The majority of the violations are related to the Albuquerque company’s improper use of BioTrack, which has been New Mexico’s track-and-trace vendor since 2015.
The CCD alleges Golden Roots reported marijuana production only two months after it had received its vertically integrated license, according to Albuquerque Business First.
Because cannabis takes longer than two months to be cultivated, the CCD was suspicious of the report.
After inspecting the company’s premises, the CCD alleged Golden Roots reported cultivation, transportation and sales in BioTrack but wasn’t able to provide officers who inspected the site evidence that the operator was cultivating cannabis.
In April, the CCD revoked Golden Roots’ license and issued a $10,000 fine, according to the news outlet.
The company requested a hearing, which the regulator scheduled for Sept. 1.
At the hearing, the CCD testified that the company’s dried-cannabis weights in BioTrack were suspicious because they didn’t seem to accurately reflect how much weight marijuana loses as it dries.
Company employees also poorly accounted for why they were making adjustments in the system of up to 24 pounds of cannabis, making comments such as “bad” or “mistake” in the software, Albuquerque Business First reported.
Golden Roots was fined $298,972.05 – the amount regulators allege the company made selling products that weren’t properly accounted for in BioTrack.
The CCD has been cracking down on cannabis operators accused of selling products procured from out-of-state or not grown legally:
- Regulators alleged in August that Albuquerque dispensary Sawmill Sweet Leaf sold out-of-state products and didn’t have a license for extraction.
- Paradise Exotics Distro lost its license in July after regulators alleged the company sold products made in California.
Golden Roots was the first alleged rulebreaker in New Mexico to be asked to pay a large fine.
Source: https://mjbizdaily.com/new-mexico-cannabis-operator-fined-loses-license-for-alleged-biotrack-fraud/
Four marijuana companies, including a multistate operator, have filed a lawsuit against U.S. Attorney General Merrick Garland in which they allege the federal MJ prohibition under the Controlled Substances Act is no longer constitutional.
According to the complaint, filed Thursday in U.S. District Court in Massachusetts, retailer Canna Provisions, Treevit delivery service CEO Gyasi Sellers, cultivator Wiseacre Farm and MSO Verano Holdings Corp. are all harmed by “the federal government’s unconstitutional ban on cultivating, manufacturing, distributing, or possessing intrastate marijuana.”
Verano is headquartered in Chicago but has operations in Massachusetts; the other three operators are based in Massachusetts.
The lawsuit seeks a ruling that the “Controlled Substances Act is unconstitutional as applied to the intrastate cultivation, manufacture, possession, and distribution of marijuana pursuant to state law.”
The companies want the case to go before the U.S. Supreme Court.
They hired prominent law firm Boies Schiller Flexner to represent them.
The New York-based firm’s principal is David Boies, whose former clients include Microsoft, former presidential candidate Al Gore and Elizabeth Holmes’ disgraced startup Theranos.
Similar challenges to the federal Controlled Substances Act (CSA) have failed.
One such challenge led to a landmark Supreme Court decision in 2005.
In Gonzalez vs. Raich, the highest court in the United States ruled in a 6-3 decision that the commerce clause of the U.S. Constitution gave Congress the power to outlaw marijuana federally, even though state laws allow the cultivation and sale of cannabis.
In the 18 years since that ruling, 23 states and the District of Columbia have legalized adult-use marijuana and the federal government has allowed a multibillion-dollar cannabis industry to thrive.
Since both Congress and the U.S. Department of Justice, currently headed by Garland, have declined to intervene in state-licensed marijuana markets, the key facts that led to the Supreme Court’s 2005 ruling “no longer apply,” Boies said in a statement Thursday.
“The Supreme Court has since made clear that the federal government lacks the authority to regulate purely intrastate commerce,” Boies said.
“Moreover, the facts on which those precedents are based are no longer true.”
Verano President Darren Weiss said in a statement the company is “prepared to bring this case all the way to the Supreme Court in order to align federal law with how Congress has acted for years.”
While the Biden administration’s push to reschedule marijuana would help solve marijuana operators’ federal tax woes, neither rescheduling nor modest Congressional reforms such as the SAFER Banking Act “solve the fundamental issue,” Weiss added.
“The application of the CSA to lawful state-run cannabis business is an unconstitutional overreach on state sovereignty that has led to decades of harm, failed businesses, lost jobs, and unsafe working conditions.”
Alabama regulators are targeting Dec. 1 to award the first batch of medical cannabis business licenses after the agency’s first two attempts were scrapped because of scoring errors and litigation.
The first licenses will be awarded to individual cultivators, delivery providers, processors, dispensaries and state testing labs, according to the Alabama Medical Cannabis Commission (AMCC).
Then, on Dec. 12, the AMCC will award licenses for vertically integrated operations, a designation set primarily for multistate operators.
Licenses are expected to be handed out 28 days after they have been awarded, so MMJ production could begin in early January, according to the Alabama Daily News.
That means MMJ products could be available for patients around early March, an AMCC spokesperson told the media outlet.
Regulators initially awarded 21 business licenses in June, only to void them after applicants alleged inconsistencies with how the applications were scored.
Then, in August, the state awarded 24 different licenses – 19 went to June recipients – only to reverse themselves again and scratch those licenses after spurned applicants filed lawsuits.
A state judge dismissed a lawsuit filed by Chicago-based MSO Verano Holdings Corp., but another lawsuit is pending.
Source: https://mjbizdaily.com/alabama-plans-to-award-medical-cannabis-licenses-dec-1/
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