Business
Opinion: Residency requirements for marijuana licenses at odds with US Constitution
As states navigate the distribution of marijuana business licenses, a number of markets have implemented state residency as a condition to apply for or receive a license.
However, as three recent court cases have addressed, residency requirements might be in conflict with the implicit dormant commerce clause of the U.S. Constitution, which generally prohibits states from passing legislation that discriminates against or excessively burdens out-of-state citizens compared to in-state citizens.
The clause expressly grants Congress the right to regulate commerce among states, although courts have interpreted it conversely to limit states’ ability to regulate in certain circumstances.
The clause restrains individual states’ ability to regulate commerce within their own borders if that regulation infringes upon congressional regulation of interstate commerce.
Judicial approach
When evaluating whether a state regulation violates the dormant commerce clause, courts often frown upon “protectionist” state policies that marginally favor in-state residents or businesses and excessively burden nonresidents conducting business within the state.
While the clause is a default “check” upon states’ abilities to burden commerce, Congress itself may approve state regulations that burden or discriminate against interstate commerce, overriding the default dormant commerce clause prohibition, as long as it very clearly authorizes such an override.
A number of states that have regulated marijuana – such as Maine, New York and Washington – will grant business licenses only to individuals or entities that meet certain “in-state residency” requirements.
But regulators have seen pushback to such requirements, and the pushback has made its way through courts across the country.
An initial case addressing this issue began in Maine, challenging the state medical marijuana law that requires officers and directors of dispensaries operating in the state to be residents.
Plaintiffs in this first case to tackle the implications of the dormant commerce clause included a Maine business that is wholly owned by three residents and operates three of seven state-licensed dispensaries as well as a Delaware company that is owned exclusively by nonresidents.
The Delaware company sought to acquire – and be the surviving owner of – the Maine business; however, the new owners would be ineligible for dispensary licenses because of the state’s residency requirement that all directors and officers must be residents.
The plaintiffs brought suit, alleging that Maine’s residency requirement violated the dormant commerce clause.
The U.S. District Court in Maine held, and 1st Circuit Court of Appeals agreed, that the residency requirement violated the dormant commerce clause, as it explicitly discriminates against out-of-state residents for no legitimate local purpose.
Notably, the 1st Circuit dismissed the state’s argument that because marijuana is still illegal federally – and thus not regulated by Congress – the dormant commerce clause could not apply.
Next, in September 2022, a challenge arose to New York’s cannabis regulation law, which requires that a business applicant have presence in the state or ownership by residents.
Regulations also require that 51% or more of the company be owned by an “eligible applicant.”
In a legal challenge, plaintiff Variscite NY One, a New York corporation, was denied a license by the state regulator because it did not meet the “significant presence” requirement.
The U.S. District Court for the Northern District of New York issued a preliminary injunction blocking state cannabis regulators from issuing marijuana retail licenses while the challenge winds through the court system.
Though this is not a final ruling on the dormant commerce clause issue, the judge granting the preliminary injunction found enough credence in the argument – he opined that the law would have a discriminatory effect on out-of-state residents and that he believed New York would lose the argument.
Lastly, in Washington, the dormant commerce clause issue arose in connection with the state’s law that regulators will not grant marijuana business licenses to individuals or entities that do not meet residency requirements.
Plaintiff Todd Brinkmeyer, an Idaho resident, provided debt financing to a friend’s Washington state cannabis businesses but remains unable to hold ownership in the businesses because he does not meet residency requirements.
A recent decision by the U.S. District Court for the Western District of Washington found that Brinkmeyer’s dormant commerce clause claims were inapplicable because cannabis remains federally illegal and, thus, the clause does not apply to a federally illegal market.
Brinkmeyer has dropped his appeal in this case, leaving in place the Washington state courts’ approach of avoiding a decision on whether the residency requirement is unconstitutional.
Future impact of decisions
The aforementioned three cases highlight a key issue: Is a state residency requirement at odds when the market in question is still federally illegal?
Does Congress’ refusal to federally legalize marijuana constitute an express “override” that renders dormant commerce clause arguments void?
Courts in Maine and New York, at least, have concluded that the dormant commerce clause does apply, rendering states’ residency requirements invalid as currently written.
Those interested in applying for a business license in any state should first be cognizant of that state’s residency requirements, if any, in order to properly prepare.
Further, the unsettled nature and seemingly undecided future of residency requirements provides an opportunity to challenge those requirements under the dormant commerce clause in the right scenarios.
Joseph Segilia is a New York-based partner in the Sullivan & Worcester law firm. He can be reached at jsegilia@sullivanlaw.com.
Source: https://mjbizdaily.com/residency-requirements-for-cannabis-licenses-at-odds-with-us-constitution/
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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