A federal appeals court has ruled that a part of New York’s cannabis licensing program illegally favors local businesses over those from other states. This decision, handed down on August 12 by the U.S. Court of Appeals for the Second Circuit, found that the state’s “extra priority” system for certain applicants is unconstitutional.
New York’s cannabis law—the Marihuana Regulation and Taxation Act, passed in 2021—established a two-tier application process. One aspect of this process, known as the “December Pool,” was designated for applicants seeking a “provisional” license. To obtain “extra priority” for this license, applicants were required to meet certain conditions, such as having a marijuana-related conviction under New York law before March 31, 2021.
Variscite NY, whose majority owners reside out-of-state, filed a lawsuit challenging the preference given to applicants with past marijuana convictions in New York. The Variscite owners had marijuana convictions in California, which disqualified them from receiving extra priority and the multiple entries in the licensing lottery that came with that status.
The Commerce Clause of the Constitution grants Congress authority over interstate commerce, while the “dormant Commerce Clause” prevents states from enacting laws that unfairly advantage their own businesses at the expense of out-of-state competitors. New York’s Cannabis Control Board and Office of Cannabis Management were named as defendants in the lawsuit, arguing that the licensing scheme didn’t violate the dormant Commerce Clause because its aim was restorative justice rather than economic protectionism. However, the court determined that the state failed to demonstrate that this discriminatory policy was the only means to achieve that goal.
In the court’s ruling, Circuit Judge Dennis Jacobs stated that the MRTA licensing favored individuals who lived in or committed crimes in New York, constituting biased economic protectionism that violated the dormant Commerce Clause and discriminated against interstate commerce. The requirement for a conviction under New York law effectively served as a proxy for New York residency, as the state could not prosecute someone from another state for acts committed outside its jurisdiction.
In a dissenting opinion, Chief Judge Debra Ann Livingston contended that the dormant Commerce Clause should not apply to the marijuana market due to its status as an illegal substance under the federal Controlled Substances Act. She argued that since the federal government aims to “eradicate” the marijuana market, it is illogical to apply a legal doctrine that compels New York to open that market based on federal justification. Livingston stated that New York’s restrictions, even if they appear discriminatory, assist Congress by discouraging interstate commerce in cannabis.
Despite the dissent, the majority opinion ruled that Congress would have needed to explicitly allow New York to favor its residents. “A prohibition intended to eradicate an interstate market is not a license for states to incubate intrastate markets in the same product,” the ruling stated.
The court’s ruling specifically applies to the “extra priority” aspect of the process for provisional adult-use licenses within the December 2023 application pool. The court found that Variscite lacked the standing to challenge other parts of the licensing process, such as the November Pool or Conditional Adult-Use Retail Dispensary program, because the company was not established in time to apply for those licenses.
The appeals court decision has sent the case back to the U.S. District Court for the Northern District of New York for reconsideration. The vacated ruling by U.S. District Judge Anne Nardacci had previously denied the plaintiffs’ request for an injunction, maintaining that the dormant Commerce Clause would not apply to markets criminalized by Congress.
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