Certain states where cannabis (or marijuana) is legal have long been getting away with a practice that has been declared unconstitutional in almost all other contexts: giving their residents preferential treatment over nonresidents when issuing permits to operate a cannabis business. Earlier this year, we wrote about the widespread use of residency rules in the cannabis industry and their conflict with the U.S. Constitution’s dormant commerce clause, which has been cited as protecting this country’s commerce against “the evils of ‘economic isolation’ and ‘protectionism.'” City of Philadelphia v. New Jersey, 437 U.S. 617, 624 (1978). At that time, one case challenging residency rules made it to a federal appeals court, and we eagerly awaited the result.
Now, the First Circuit Court of Appeals has spoken. In a 2-1 decision, the court affirmed a lower court’s decision to strike down a Maine law that required officers or directors of a medical cannabis dispensary to be residents of the state. The law was challenged by an out-of-state company, High Street Capital, which sought to acquire a Maine company with three dispensary licenses (Northeast Patients Group). The state argued that the dormant commerce clause should not apply to cannabis regulation because cannabis businesses are federally illegal, and the Controlled Substances Act (CSA) has therefore eradicated the interstate market for cannabis. Rejecting these arguments, the majority observed that, despite cannabis’ federal illegality, there continues to be an (illegal) interstate market for the plant. Moreover, Maine laws explicitly allow out-of-state qualified patients to purchase and possess limited quantities of cannabis in Maine — a requirement that, as the court pointed out, necessarily acknowledges the existence of an interstate market.
The majority also looked to federal action on cannabis — specifically the Rohrabacher-Farr Amendment, which, since 2015, has prohibited the Department of Justice from using federal monies to prosecute state-legal medical cannabis activity. Notwithstanding the CSA, the court noted that “this is not a case in which Congress may be understood to have criminalized a national market with no expectation that an interstate market would continue to operate. Quite the opposite. Congress has taken affirmative steps to thwart efforts by federal law enforcement to shut down that very market, through the annual enactment of the Rohrabacher-Farr Amendment.”
For its part, the dissent agreed that Maine’s residency requirement “incontestably constitutes protectionist legislation,” but disagreed that the dormant commerce clause would apply. “[T]he ‘fundamental objective’ of the dormant Commerce Clause to preserve a competitive national market is inapplicable,” the dissent observed, “because Congress has already outlawed the national market for marijuana.”
So, what happens next? Here are five takeaways:
1. Other state and local residency laws in the First Circuit and elsewhere could soon end.
Because the First Circuit’s decision is binding on jurisdictions in that circuit — namely, Maine, Massachusetts, New Hampshire, Rhode Island, and Puerto Rico — we expect those jurisdictions to cease enforcing similar residency laws in their states or face possible copycat challenges. Rhode Island, for instance, requires that all “principal officers” and “board members” of its medical cannabis dispensaries (compassion centers) be residents of the state of Rhode Island. Similarly, in Massachusetts, licenses for craft marijuana cooperatives are reserved for residents of the commonwealth, and a majority of owners of a microbusiness license must be residents.
Moreover, because the First Circuit is the first Federal Circuit Court of Appeals to resolve this issue, it could serve as a blueprint for other appellate courts across the country. If other courts of appeals agree with the majority that there is an interstate market for cannabis, notwithstanding its federal illegality as the dissent argues, then explicit residency requirements in other circuits are also likely to fall. These decisions would also apply to localities (cities, counties, towns) within the circuit. See C & A Carbone, Inc. v. Town of Clarkstown, N.Y., 511 U.S. 383 (1994).
The Supreme Court has held that a statute can survive a dormant commerce clause challenge if it “regulates evenhandedly to effectuate a legitimate local public interest” and “its effects on interstate commerce are only incidental,” City of Philadelphia, 437 U.S. at 624, or that “it is narrowly tailored to advance a legitimate local purpose,” Tenn. Wine & Spirits Retailers Ass’n v. Thomas, 139 S. Ct. 2449, 2461 (2019). Whenever the state expressly gives an advantage to residents over nonresidents in cannabis licensing schemes, it will be difficult for the state to argue that a statute regulates “evenhandedly” and imposes only an “incidental” effects on interstate commerce.
2. Whether more narrowly tailored residency requirements, such as social equity programs, could survive remains unclear.
The First Circuit found Maine’s law to be “patently protectionist” and a “substantial burden” on interstate commerce where the law broadly and explicitly required “directors, managers, shareholders, board members, partners, or other persons holding a management position or ownership interest in the organization” to be residents.
Moving forward, it will be a closer call for courts to determine whether the dormant commerce clause is violated when a state’s residency requirements are more “narrowly tailored to advance a legitimate local purpose.” For instance, social equity programs often require applicants to show proof of residence to qualify for social equity licenses. If challenged, regulators may argue that providing economic opportunity in the cannabis industry to individuals most impacted by the state’s former prohibition on cannabis is a legitimate local purpose that can only be achieved by limiting the availability of social equity licenses to state residents. Similarly, Massachusetts may argue that reserving its craft marijuana cooperative and microbusiness licenses for residents is narrowly tailored to advance a legitimate purpose such as promoting local enterprise in these license types.
Another closer call will have to do with laws that give preference to residents not on their face, but in their effects. For instance, some states issue licenses after competitive licensing programs that award additional points to companies owned or operated by locals, or with substantial experience in the local economy. There, the law would not expressly discriminate against nonresidents on its face, but, because nonresidents are less likely to qualify for these extra points, the effect of the law might be the same.
3. It remains to be seen whether this decision will be extended to adult-use cannabis residency rules.
The First Circuit’s decision hinged heavily on the Rohrabacher-Farr Amendment as evidence that Congress recognizes the national market in medical cannabis. Because the Rohrabacher-Farr Amendment does not currently protect adult-use cannabis laws, it remains to be seen whether courts will feel the same about residency rules that apply to adult-use cannabis licenses, or whether those protections will survive because adult-use cannabis is “more federally illegal” than medical cannabis.
4. Small cannabis operators in these states may soon face larger competitors.
One of the intended benefits of residency rules in the cannabis industry is often to foster the growth of small, local businesses and prevent monopolization by large out-of-state operators. As states that were previously closed to nonresidents open to out-of-state businesses, however, we anticipate smaller businesses will have to find other means to remain competitive in a rapidly changing marketplace.
5. Congress could explicitly allow states to implement residency rules that would offend the dormant commerce clause.
Lastly, as we noted previously, Congress retains the power to enact a law that explicitly permits states to do something that the dormant commerce clause would otherwise prohibit. It remains to be seen whether Congress decides to allow the states to continue enforcing their residency rules as part of any future cannabis legalization legislation.