By: Irina Dashevsky, Partner and Ryan Holz, Partner
Several district courts throughout the country, including the U.S. District Court for the District of Maine, have overturned state cannabis laws requiring owners and/or key personnel to be state residents, often relying heavily on dormant Commerce Clause principals. Last week, the First Circuit U.S. Court of Appeals in Northeast Patients Group v. United Cannabis Patients and Caregivers of Maine , 2022 WL 3442203 (1st Cir. August 17, 2022) became the first federal court of appeals to address the issue. The First Circuit affirmed the District Court’s decision, which places residency requirements on even shakier grounds.
What is the dormant Commerce Clause? To understand it, let’s begin with the Commerce Clause. The Commerce Clause states the “Congress shall have [the] [p]ower…[t]o regulate Commerce…among the several States.” This is an affirmative grant of power to Congress to regulate interstate commerce, but it has also been consistently recognized as constraining such individual states from making laws that substantially burden interstate commerce. The prohibition on state laws that substantially burden interstate commerce is what is known as the “dormant Commerce Clause.”
Back to the case at hand. Maine’s Medical Use of Marijuana Act required that to be eligible for a dispensary license, “all [the] officers or directors of a dispensary must be residents of [Maine].” 22 M.R.S. Sec. 2422(6)(H). Plaintiff Northeast Patients Group is a Maine dispensary that met the residency requirement, and subsequently sought to sell to Plaintiff High Street Capital, which would not meet the residency requirement. Plaintiffs sued the Maine Department of Administrative and Financial Services and its commissioner, Kirsten Figueroa, in federal court alleging the residency requirement violated the dormant Commerce Clause. The District Court agreed with Plaintiffs, and permanently enjoined enforcement of the residency requirement. Maine, in turn, appealed to the First Circuit.
Maine acknowledged that its residency requirement, if adopted to regulate a federally legal market, would be impermissibly protectionist under the dormant Commerce Clause. Maine argued, however, that because cannabis is federally illegal, the usual dormant Commerce Clause analysis does not apply, and it is free to discriminate against out-of-state residents in this manner. The First Circuit rejected this argument in a 2-1 decision.
First, the Court rejected the idea that simply because cannabis is federally illegal, there can be no interstate market for it, calling that premise “mistaken.” “That is not just because it is possible for an interstate commercial market in contraband to exist, as the persistence of interstate black markets of various kinds all too clearly demonstrates. It is also because the Supreme Court has recognized as much in connection with its review of Congress’s attempt to exercise the Commerce Clause’s affirmative grant of power to stamp out the interstate market in marijuana.” The Court further noted the logical problem with Maine’s position—if there was no interstate market for cannabis as Maine suggested, why were there numerous out-of-staters seeking to enter the cannabis market and why does Maine allow out-of-staters to possess cannabis in Maine?
Second, the Court rejected Maine’s argument that because Congress has used its affirmative Commerce Clause power to regulate cannabis, i.e. make it illegal, the dormant Commerce Clause becomes a nullity. The Court concluded that Maine was conflating two separate issues—preemption and the dormant Commerce Clause. Even if the federal Controlled Substances Act does not preempt Maine’s residency requirement, “the negative implication of the commerce power may pose an independent bar to state regulation of an interstate commercial market…”
Third and finally, Maine (and the dissent) argued that Congress, by passing the Controlled Substances Act, consented to what would otherwise be impermissible state regulations such as this. While acknowledging the general rule that an express statement of consent from Congress was required to bless State protectionism, Maine and the dissent argued that the express consent requirement should be bypassed in circumstances where the federal government has outlawed the federal market entirely. The First Circuit accepted the premise (for the sake of argument), but nevertheless concluded that there was not sufficient evidence that Congress was consenting in these circumstances, expressly or otherwise. Specifically, the Court noted that while Congress has eliminated any federal cannabis market via the Controlled Substances Act, it has passed the Rohrabacher-Farr Amendment “to address the extent to which, the CSA notwithstanding, the market in medical marijuana may be protected from federal prosecutorial action.” But nothing in the Rohrabacher-Farr Amendment suggests that Congress was blessing regulations that would otherwise violate the dormant Commerce Clause.
The Court concluded its analysis by rejecting two additional arguments raised by the dissent. The dissent contended that the Court was extending the reach of the Commerce Clause into an illegal market, but the Court contended that it was merely applying traditional Commerce Clause principals to a new circumstance. The dissent also contended that federal courts should not provide a remedy to protect an illegal market, which the Court rejected on grounds that the dormant Commerce Clause applies even to markets that Congress has made illegal.
There are several implications to the decision. More narrowly, the decision confirms that state law residency restrictions remain very vulnerable to challenge. District courts rejecting such restrictions is one thing, but a federal appellate court adopting the logic of those decisions is significant precedent. We are likely to see more litigation on this topic if states continue to implement residency restriction. We would note, however, that there are varying degrees of protectionism being adopted by states with respect to residency, and it is not clear that all residency protectionism will be prohibited. The Maine statute in question was aggressive, but statutes that provide preferences to residents, but do not mandate residency, may still survive. The residency challenges are far from over.
More broadly, this decision indicates that the complicated and messy relationship between state and federal cannabis law is poised to continue, and may perhaps reach the Supreme Court sooner than later. The fact that this decision was 2-1 suggests that there remains a serious debate as to whether, and to what extent, the federal Commerce Clause and dormant Commerce Clause apply to an industry that the federal government itself has declared illegal in its entirety. The ultimate resolution of that conundrum could have a wide-ranging impact on the industry.
