Second Circuit Brings State-Tied Restorative Justice Licensing Under Constitutional Scrutiny

New York’s attempt to bake “home field advantage” into its cannabis licensing process just ran into a constitutional buzzsaw. In Variscite NY Four, LLC v. New York State Cannabis Control Board, No. 24‑384 (2d Cir. Aug. 12, 2025), the Second Circuit held that—even in a federally illegal market—the Dormant Commerce Clause still applies. New York cannot favor applicants with New York convictions, even under the banner of social or restorative justice.

The Licensing Rule: Extra Priority with a Twist

New York’s 2023 adult-use cannabis licensing rollout included multiple “pools” of applicants for provisional dispensary licenses. The December Pool—at the heart of Variscite—featured an “Extra Priority” track designed to accelerate applications from those who met all three of the following criteria:

1. Residence in a disproportionately impacted community,
   
2. Below‑median county income (80% lower than the median where they reside), and
   
3. A cannabis-related conviction under New York law (or a close relative’s).

Applicants meeting all three criteria received two entries into the lottery, as opposed to the single entry awarded to applicants meeting only the first two. That extra entry doubled their odds—a meaningful advantage given the limited number of licenses available and intense competition statewide.

Variscite NY Four and Variscite NY Five—LLCs majority-owned by a California resident who had a California marijuana conviction—met the first two requirements but were categorically excluded from the extra lottery entry because their conviction was not under New York law. They argued this was economic protectionism dressed in restorative justice clothing: New York had effectively created a preference for its own residents without explicitly calling it a residency requirement.

They sued in the Northern District of New York, challenging both the December Pool’s Extra Priority scheme and certain aspects of the earlier November Pool process. The district court denied preliminary relief, siding with New York’s argument that because cannabis remains federally illegal under the Controlled Substances Act, the Dormant Commerce Clause did not apply. The Second Circuit took a different view—finding the case ripe, standing established, and the legal theory sound enough to warrant a reversal and remand.

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The Second Circuit’s Verdict

The Second Circuit’s analysis started with justiciability—whether this case was ready for judicial review. The panel had no trouble concluding it was. Variscite wasn’t speculating about a hypothetical future injury; they had already suffered a tangible competitive disadvantage in the December Pool because they couldn’t qualify for an extra lottery entry. That was enough for both standing and ripeness.

On the merits, the court found the district court’s Dormant Commerce Clause analysis “was error.” The district court had accepted New York’s core defense: because cannabis commerce is federally illegal under the Controlled Substances Act, the Constitution’s protection against state economic protectionism does not apply. The Second Circuit flatly rejected that view, holding:

“The dormant [sic] Commerce Clause prohibits state protectionism unless Congress clearly authorizes specific protectionist laws.”

The panel emphasized that Congress has not spoken on whether states may impose residency-based or conviction-location preferences in cannabis licensing. In the absence of such clear authorization, the Constitution’s usual ban on discriminatory economic regulation applies—even to federally illegal markets.

The court also dug into the purpose and effect of New York’s Extra Priority rule. New York claimed the program’s goal was “restorative justice, not economic protectionism.” The panel, however, looked past the branding:

“New York’s prioritization of applicants with convictions under New York law is a protectionist measure that cannot stand.”

By conditioning extra chances in the licensing lottery on the geographic location of a prior conviction, the state effectively created a proxy for residency—a strategy courts have repeatedly found unconstitutional in other regulated markets.

Importantly, the Second Circuit noted that slapping the word “justice” into a program’s name or description does not immunize it from constitutional scrutiny. Labels don’t matter; discriminatory substance does. Going so far as to note in Footnote 4 “It is rarely a good sign when defenses are premised on attaching an adjective to the word ‘justice.’”

The remedy was decisive: the panel vacated the district court’s denial of preliminary relief and remanded the case for further proceedings. That means Variscite is now in a much stronger position to secure relief before the licensing process concludes.

Chief Judge Livingston dissented in part, taking the position that the Dormant Commerce Clause shouldn’t apply in markets Congress has banned outright. In her view, states regulating such contraband should have latitude to prefer their own residents without running afoul of the Constitution. But the majority’s reasoning—mirroring other appellate and district court decisions around the country—was that federal prohibition doesn’t grant states carte blanche to discriminate.

A Pattern Forming Across Jurisdictions

This isn’t a one-off. Courts around the country have been dismantling similar schemes:

• First Circuit – Northeast Patients Group v. Maine: Residency requirement struck down.
  
• D. Me. – NPG LLC v. Portland: Local preference points invalidated.
  
• W.D. Mo. – Toigo v. Missouri: In-state majority ownership rule struck (link to final fee opinion noting the prior rulings).
  
• E.D. Mich. – Lowe v. Detroit: Resident preference enjoined.
  

In New York itself, earlier Variscite One litigation challenged residency requirements in CAURD and secured preliminary relief.

With this decision, the Second Circuit now binds New York, Connecticut, and Vermont—adding appellate heft to the trend and increasing the likelihood of Supreme Court involvement if splintering jurisdictional views emerge.

The Road Ahead: Restorative Justice or Equal Protection Roadblock?

This case is more than about residency or convictions—it’s about how far restorative justice measures can stretch before infringing on constitutional protections. While Variscite didn’t invoke Equal Protection directly, one can’t help but ask: what’s next?

As jurisdictions craft equity-based cannabis programs, legal challenges may shift toward Fourteenth Amendment theories—arguing that such programs, if based on impermissible criteria (like race, national origin, or other suspect classifications), may be unconstitutional, regardless of their altruistic aims. The next wave could force courts to balance societal remedies with indivisible constitutional guarantees. These are more likely than not on the horizon. Many states have crafted programs using criteria that are directly correlated to race-based determinations even though race is not the stated criteria. (e.g., BLS districts, disproportionately impacted locations, accepting copies of driver’s licenses or other identification as part of an application process which involves pictures and race-based data related to applicants.) Given Fourteenth Amendment jurisprudence, in protecting these programs states need to continue collecting data not only to support the initial circumstances giving rise to their plans showing that discrimination in a recent timeframe played a part in the social ill that the program seeks to remedy (this is likely an easy lift), but also start collecting data to show that application of these selective criteria have a positive impact in remedying that historical ill.

Takeaway for Regulators and Applicants

Equity and constitutional compliance must go hand in hand. Giveaways based on location or conviction origin are vulnerable—even if wrapped in “justice” labels. If you’re licensing in New York or elsewhere, the Second Circuit’s message is crystal clear: substance matters more than semantics. Labels like “restorative” don’t confer immunity.

For applicants, Variscite provides fresh grounds to challenge licensing barriers that freeze them out of the market or relegate them to less competitive pools. For states, it’s a call to rethink and redesign equity programs so they expand opportunity without running afoul of constitutional limits.