It has been four months since U.S. District Court Judge Gary Sharpe issued an injunction barring the New York Office of Cannabis Management (OCM) from issuing any conditional adult-use retail dispensary (CAURD) licenses in the Finger Lakes, Central New York, Western New York, Mid-Hudson and Brooklyn regions during the pendency of the lawsuit.[1]

Although the state recently announced it plans to double the number of CAURD licenses issued, unless the state’s latest appeal is granted, those in the affected regions will have to sit on the sidelines as the rest of the state begins to ramp up recreational retail sales.

Michigan-based Variscite NY One (“Variscite”), challenged New York’s CAURD license requirements. Specifically, Variscite challenged the requirement that licenses be issued only to “justice involved” individuals with past marijuana convictions with a significant presence in New York.

Variscite’s owners are no strangers to cannabis-related litigation as they also filed an action in the U.S. District Court for the Central District of California[2] challenging the Los Angeles Department of Cannabis Regulation’s plan to award retail licenses, arguing the city statute runs afoul of the Constitution's dormant commerce clause because it unfairly tips the scales in favor of city and state residents.

OCM previously filed a motion to dismiss or otherwise limit Judge Sharpe’s decision to block retail licenses in those regions, which was ultimately denied as “unpersuasive.” OCM is now seeking a reversal of Judge Sharpe’s decision.

The state’s newest appeal argues Judge Sharpe’s injunction should be lifted because “reversal on appeal is likely, and the balance of equities favors defendants.”

The state argued Variscite meets the “significant presence” licensing requirement because it is incorporated in New York; therefore, the cannabis company is not being discriminated against. But, the state claims Variscite’s application did not otherwise score high enough to qualify for a license.

Further, the state argued:

• The residency requirements do not violate the Dormant Commerce Clause because they do not discriminate against out-of-state actors, and if the requirements do “burden” interstate commerce, that does not exceed the state’s interest to rectify the harm caused by its historical marijuana laws and the selective enforcement of those laws.

• The state will suffer irreparable harm if the injunction is not lifted. “The preliminary injunction leaves the putative recipients of 54 dispensary licenses indefinitely unable to do business and threatens the economic stability of cannabis growers and manufacturers who will, as a result of the injunction, lack enough buyers for their goods.”

With a trial date set for mid-2024, the uncertainty surrounding New York’s cannabis market continues, further delaying the approval of 54 licenses in the five territories under injunction.

Courts Vary on Marijuana Residency Requirements

When many states, including New York, legalized marijuana, they established residency requirements to ensure state residents receive the financial benefits of legalization in their own state and to curtail outside entities from entering and dominating a newly legalized state market from afar.

The appeal to the United States Court of Appeals Second Circuit could draw another federal opinion on residency requirements. Recent court rulings have been contradictory, muddling the legal landscape around the interstate commerce of marijuana.

Judge Benjamin Settle, a judge with the United States District Court, Western District of Washington in Tacoma, upheld Washington state’s residency requirement for involvement in the state’s legal cannabis industry, finding it could not violate interstate commerce laws because there is no legal interstate commerce of cannabis – a drug illegal under federal law.

Meanwhile, in August 2022, the First Circuit Court ruled a Maine residency requirement violated the dormant commerce clause because it “explicitly discriminates against residents of other states and Maine cannot show a legitimate local purpose for the requirement.”

In the wake of these varying court decisions, it is unclear when, where and how the cannabis industry will glean legal certainty on interstate commerce in the cannabis market. Perhaps a federal circuit court split might lead to a decision by the United States Supreme Court. Or, federal legalization of marijuana occurs.

For now, we must abide by individual court decisions. And interstate commerce doesn’t answer other questions, such as taxation, tax exemptions, or bankruptcy protection, that result from the product being legal on one level and illegal on another.

The regulatory landscape for the cannabis industry is still very much unsettled.

[1]  Variscite NY One, Inc. v. State of New York, Case No. 1:22-cv-01013.

[2] Variscite, Inc. et al. v. City of Los Angeles et al., Case No. 2:22-cv-08685.