Judge Pauses New York Dispensary Licenses Due to Dormant Commerce Clause

On November 10, 2022, a federal judge temporarily stopped the Office of Cannabis Management (OCM) from issuing retail pharmacy licenses (CAURD) for adult use in certain parts of New York. Why: The CAURD request contained New York residency requirements that may violate the US Constitution (specifically, a court-created doctrine called “dormant commerce clause”). A copy of the full decision can be found here.

CAURD LICENSES

OCM plans to issue 150 CAURD licenses to qualified applicants. A CAURD licensee will be able to operate an adult recreational cannabis retail business in upstate New York. The CAURD application window closed in September, but OCM has not yet issued CAURD licenses.

OCM has divided New York State into regions and plans to issue a specific number of CAURD licenses in each region. In their applications, the CAURD applicants ranked their top 5 regions.

CAURD APPLICATION REQUIREMENTS

CAURD regulations include residency requirements in New York. For example, an applicant must “establish a significant presence in the state of New York, either as an individual or through a principal place of business in the state.” Also, a qualifying CAURD applicant (or their parent, guardian, spouse, child or dependent) must have been “convicted of a marijuana-related offense in New York State” prior to March 31, 2021 (there are other NY-specific CAURD requirements, but we don’t need to go through them all here.)

VARISCITE SUIT

CAURD applicant Variscite NY One, Inc. is 51% owned by a person with a cannabis conviction in Michigan (rather than New York). Variscite chose Finger Lakes, Central New York, Western New York, Mid-Hudson, and Brooklyn as his five preferred regions.

In September, Variscite sued the state of New York, alleging that the CAURD rules were unconstitutional. Specifically, Variscite alleges that the CAURD rules violate the “dormant commerce clause,” a court-created jurisprudence based on the Constitution’s commerce clause.

In a previous Green Light Law blog post, we summarized the dormant trade clause as follows:

The US Constitution contains a passage commonly referred to as the “Commerce Clause” which provides that “Congress shall have power . . . to regulate trade. . . among the several states[.]The U.S. Supreme Court has long interpreted this clause as containing a corollary or “dormant” commerce clause that prevents states from enacting laws that inhibit trade between states.

In a recent case, Tennessee Wine and Spirits Retailers Association v. Thomas, SCOTUS ruled in 2019 that SCOTUS invalidated a two-year residency requirement for Tennessee liquor retail stores. In applying the DCC to the present case, the Court wrote: “Where a state law discriminates against foreign goods or non-resident economic operators, the law can only be upheld if it is shown to be closely tailored to further a legitimate local purpose. Noting that “Tennessee’s 2-year permanent residency requirement clearly favors Tennesseans over nonresidents, SCOTUS determined that the statute was not “narrowly tailored” to advance a legitimate local purpose and declared the Tennessee residency requirement unconstitutional.”

Simply put, the Constitution grants the federal government jurisdiction over all interstate commerce, and when a state statute or regulation prohibits or prevents interstate commerce by favoring its residents over residents of other states, it is against the constitution.

COURT FINDS LIKELY CONSTITUTIONAL CONDUCT IN NY HOUSING REQUIREMENT

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 request for a preliminary injunction. Essentially, Variscite asked the court to prevent OCM from issuing CAURD licenses in five geographic areas where it applied while the lawsuit was pending.

Courts do not issue restraining orders lightly because they require the court to act before either party has had an opportunity to present their case in court. A plaintiff seeking an injunction must meet several criteria, including his or her chances of succeeding in the case. Therefore, the Court’s analysis in this case began by asking whether Variscite was likely to succeed on the basis of its dormant trade clause argument.

Photo by Anton Petrus/Getty Images

In evaluating a challenge to a dormant trade clause, a court first considers whether the contested statute discriminates against interstate commerce in favor of domestic commerce or whether it regulates impartially. The court found that requiring CAURD applicants to demonstrate a significant presence in New York will have a “discriminatory effect on out-of-state residents.”

RELATED: What will New York do if pharmacies don’t open on time?

When a law or regulation has such effect, it can only stand up to legal challenge if it is “closely tailored to further a legitimate local purpose”. That turned out to be all that was required, as according to the court, OCM “doesn’t even try” to explain how narrowly tailored its rules are. When asked directly by the court, “the defendants did not give a convincing answer”.

That’s surprising. Whether or not you agree with OCM’s CAURD requirements, you should be able to develop at least several arguments as to WHY these regulations are narrowly tailored to not violate the dormant trade clause. Having established a likelihood of success in the matter, Variscite was able to meet the other criteria required to obtain an injunction in the geographic areas it applied.

FINAL EFFECT

New York regulators have made it a priority to issue CAURD licenses before the end of the year. Although this injunction could be lifted and is limited to five geographic areas, it doesn’t bode well for New York’s schedule. It could also open the door to other challenges related to New York’s cannabis residency requirements.

We will continue to monitor this case and report how it develops.

Ramsey Chamie is a corporate and litigator focused on complex cannabis and non-cannabis transactions and litigation. Daniel Shortt is a Seattle, WA-based corporate and regulatory attorney who works extensively with entrepreneurs in the cannabis industry. You can reach Ramsey and Daniel at (917) 764-4896 or info@gl-lg.com. This article originally appeared on the Green Light Law Group and has been republished with permission.