States’ measures to favor in-state residents in cannabis licensing are the new Commerce Clause battleground.

Back in May of this year the Commerce Clause provided a substantial victory for cannabis companies looking to achieve fair-play amongst the states that have authorized cannabis programs and sales.

An out-of-state company looking to obtain cannabis licensure in Maine successfully fought a state court action and settled with Maine regulators to stop enforcing residency requirements for state licensure. An activist group is currently attempting to defend the statutory requirement and force Maine regulators to enforce the residency requirements in a federal case, but a recent motion to dismiss their claims makes apparent that even Maine’s top officials agree the requirement is a Commerce Clause violation noting that even the dismissal order (copy in the motion in the link above) from the state court case acknowledged the requirement would not withstand Constitutional challenges (and Maine’s Attorney General decided not to defend the residency requirement).

Several months later a federal court in Maine also issued a preliminary injunction preventing Portland, Maine from using residency-related criteria when awarding municipal cannabis licenses. There, in addition to finding the residency requirements did not advance a legitimate local purpose potentially defeating a Commerce Clause challenge, the Court also found the City’s requirements were not saved by federal congressional action regarding marijuana’s status under the Controlled Substances Act:

The City portrays the Controlled Substances Act as a form of congressional consent. Def.’s Mot. 10 (arguing that the Plaintiffs “cannot make out a case for protection under the dormant Commerce Clause” because “Congress has exercised its right to regulate marijuana under the Commerce Clause . . . and has chosen to prohibit it”). But the Act nowhere says that states may enact laws that give preference to in-state economic interests. In other words, although the Controlled Substances Act criminalizes marijuana, it does not affirmatively grant states the power to “burden interstate commerce ‘in a manner which would otherwise not be permissible.’ ” New England Power Co., 455 U.S. at 341 (quoting Southern Pacific Co. v. Arizona, 325 U.S. 761, 769 (1945)).

A similar fight occurs now in Oklahoma, where an out-of-state company asserts that a similar residency requirement violates the dormant Commerce Clause and has filed its motion for judgment on the pleadings to get to the heart of the matter. As with the Maine residency requirement, Oklahoma’s Medical Marijuana and Patient Protection Act excludes non-Oklahoma residents from the state’s medical marijuana market. 

Specifically, the Act requires that:

b. any applicant applying as an individual shall show proof that the applicant is an Oklahoma resident pursuant to paragraph 11 of this subsection, and

c. any applicant applying as an entity shall show that seventy-five percent of all members, managers, executive officers, partners, board members or any other form of business ownership are Oklahoma residents pursuant to paragraph 11 of this subsection. OKLA. STAT. TIT. 63 § 427.14(E)(7)

Paragraph 11 of that subsection of the Act goes on to define an Oklahoma resident as follows:

In order to be considered an Oklahoma resident for purposes of a medical marijuana business application, all applicants shall provide proof of Oklahoma residency for at least two years immediately preceding the date of application or five years of continuous Oklahoma residency during the preceding twenty-five years immediately preceding the date of application. Id

Citing Tennessee Wine the brief linked above decimates the measure as protectionist drivel intended to benefit in-state interests and discriminate against out-of-state ones also pointing out that the Federal status of marijuana as a controlled substance does not relieve Oklahoma of its Constitutional obligations:

The bedrock rule of the dormant Commerce Clause, that “[p]rotectionism . . . is forbidden,” Camps Newfound/Owatonna, 520 U.S. at 588, is not somehow suspended or attenuated with respect to state regulation simply because the federal government regulates marijuana too. See Philadelphia v. New Jersey, 437 U.S. 617, 622 (1978) (“All objects of interstate trade merit Commerce Clause protection; none is excluded by definition at the outset”). If states elect to permit this form of commerce, they are not free to discriminate against citizens of other states. See Camps Newfound/Owatonna, 520 U.S. at 578 (“By encouraging economic isolationism, prohibitions on out-of-state access to in-state resources serve the very evil that the dormant Commerce Clause was designed to prevent.”). The dormant Commerce Clause applies to state cannabis regulations just like it applies to any other state laws. 

Provided Oklahoma cannot show its requirement serves some legitimate stated purpose, this case should also end as Maine’s have.

These suits should have every company losing licensing applications for dispensaries and cultivators questioning whether a state system discriminates against out-of-state residents. For instance, Illinois’ social equity status awards points to Illinois residents and also points to people that live in or companies that hire people from specific areas only in Illinois that have been deemed disproportionately impacted areas. Again, none of these areas fall outside Illinois.

Perhaps the Illinois point system was thought to be a “factor among many” and an “advancing a legitimate local purpose” side-step amalgamating different constitutional precedents into a Frankenstein’s monster attempting both Equal Protection and Commerce Clause challenge parrys. The Equal Protection deflection is apparent and state and local legislators have consistently conflated support of minority groups with the intent of the race-neutral social equity language in the Illinois Cannabis Regulation and Tax Act. The neutral language makes it harder for those that would challenge the bill to do so facially. 

The Commerce Clause is a different beast, and so is its precedent. One of its many functions operates to strike down economic protectionism between the states. Although there is a point system in Illinois, the impact of awarding additional points to Illinois residents and those that only live in select areas in Illinois may seem to avoid outright discrimination against out-of-stater’s. But it has the same effect given that no applicants that are out-of-state or that do not hail from the state’s selected areas will ever achieve the points that an Illinois resident can. And lest you think Illinois’ stated purpose of remedying historical harms saves it under a local interest analysis, the local interest notion faces a challenge as well; the same economic and impact analysis could easily be applied across multiple states to come up with Disproportionately Impacted Areas outside Illinois. The impact is discrimination against out-of-state interests and it is only a matter of time until some enterprising company challenges the Illinois’ residency and social equity system as a Commerce Clause violation. 

Ashley Brandt

Hi there! I’m happy you’re here. My name is Ashley Brandt and I’m an attorney in Chicago representing clients in the Food and Beverage, Advertising, Media, and Real Estate industries. A while back I kept getting calls and questions from industry professionals and attorneys looking for advice and information on a fun and unique area of law that I’m lucky enough to practice in. These calls represented a serious lack of, and need for, some answers, news, and information on the legal aspects of marketing and media. I've got this deep seeded belief that information should be readily available and that the greatest benefit from the information age is open access to knowledge... so ... this blog seemed like the best way to accomplish that. I enjoy being an attorney and it’s given me some amazing opportunities, wonderful experiences, and an appreciation and love for this work. I live in Chicago and work at an exceptional law firm, Goldstein & McClintock, with some truly brilliant people. Feel free to contact me at any time with any issues, comments, concerns… frankly, after reading this far, I hope you take the time to at least let me know what you think about the blog and how I can make it a better resource.

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