On November 10, 2022, a Judge Gary L. Sharpe of the New York Federal District Court in Syracuse entered an order enjoining New York’s retail cannabis dispensary application process in five regions of the state (Brooklyn, Central New York, Finger Lakes, Mid-Hudson and Western New York) for the Conditional Adult Use Retail Dispensary (“CAURD”) licenses.
Cannabis and the dormant commerce clause
This decision follows similar decisions from other states’ federal courts that have found provisions in cannabis licensing rules that unfairly favor in-state residents over out-of-state residents violate the “dormant commerce clause” of the U.S. Constitution (“DCC”). We first analyzed DCC exposure for programs like New York’s all the way back to 2015.
In short, the Dormant Commerce Clause refers to the prohibition, implicit in the Commerce Clause (Article 1, Section 8, Clause 3 of the U.S. Constitution), against states passing legislation that discriminates against or excessively burdens interstate commerce. More specifically, the importance is the prevention of protectionist state policies that favor state citizens or businesses at the expense of non-citizens conducting business within that state.
CAURD and the dormant commerce clause
As we previously discussed (here), all applicants for the CAURD license were required to demonstrate a significant presence in New York, either individually or by having a principal corporate location in New York. For entities, the New York “presence” requirement can be met by a majority ownership interest in the entity being held by individuals who are physically present in New York for at least 180 calendar days in the current year, or 540 calendar days over the past three years.
The Variscite litigation
The Plaintiff in this action is Variscite, a company organized under the laws of the State of New York submitted an application for CAURD license. However, Variscite was 51% owned by an individual (the majority owner) has a cannabis conviction under Michigan law and has no significant connection to New York, it was determined that Variscite was ineligible to be selected for a CAURD license. The federal judge agreed with Variscite that the New York residency requirement discriminated against out of state applicants, was not narrowly tailored to serve a compelling state policy, and therefore violated the DCC implied in the Constitution.
During Variscite’s application process, Variscite selected Brooklyn, Central New York, the Finger Lakes, the Mid-Hudson area and Western New York as its regions for possible licensure. As such, the judge ruled that New York could not issue CAURD Licenses to operate dispensaries in those five (5) regions while the case is pending. Based upon the ruling it is anticipated that the ruling will affect approximately 63 of the 150 CAURD licenses that the Office of Cannabis Management planned to issue by the end of this calendar year. Eleven other regions, including the Bronx, Manhattan, Queens, Staten Island and Long Island, were not affected by the judge’s ruling.
What’s next
This decision significantly hampers New York’s plan to begin recreational cannabis sales this year. It is unclear how New York will move forward with the CAURD licensing and/or if they will continue to enforce the “presence” requirement for the unaffected regions or for any other type of license New York intends to award for cannabis sales in the state.
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