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. (Full Story)