New Lawsuit Challenges Maryland Cannabis Administration’s Social Equity Program Under ‘Dormant Commerce Clause,’ Seeks Injunction Against Issuing Licenses

Foley Hoag LLP - Cannabis and the Law

Foley Hoag LLP - Cannabis and the Law

According to a Complaint filed on January 26, 2024, in the United States District Court for the District of Maryland, Maryland's adult-use cannabis licensing program, which is currently limited to applicants who qualified for the Social Equity Program, violates the “dormant Commerce Clause” of the Constitution by discriminating against out-of-state applicants. A California-based attorney filed suit on behalf of a California resident who was denied eligibility for a retail cannabis permit in Maryland because she could not use her attendance at a college in California, as opposed to Maryland, to qualify as a Social Equity Applicant for participation in the current round of licensing.  

The Plaintiff seeks an injunction against the Maryland Cannabis Administration (MCA) to block the processing and an injunction to prevent the MCA from issuing of an adult-use cannabis licenses in Maryland during this current round. 

Recap of Maryland Social Equity Criteria
As discussed in this blog and in webinars, the MCA is issuing additional licenses for adult-use cannabis via a lottery, and in at least two rounds, per the relevant laws and regulations in the state. While current Maryland residency is not required for qualification, the current round of licensing was only open to Social Equity Applicants, meaning applicants who met one of three criteria: (1) lived in a Disproportionately Impacted Area (“DIA,” as defined in the relevant authorities) for five of the last 10 years immediately preceding the submission of the application; (2) attended a public school in a DIA for at least five years; or (3) for at least two years, attended a four-year institution of higher education in Maryland where at least 40% of attendees are eligible for a Pell Grant.  Social Equity Applicants had to confirm their status, via the MCA’s Social Equity Verification Portal, before submitting licensing applications. The current round of licensing applications were due on December 12, 2023.

Complaint and Allegations of Unconstitutionality
The Complaint alleges that the MCA’s third Social Equity criterion—attending a four-year institution of higher education in Maryland, where at least 40% of attendees are eligible for Pell Grants, for at least two years—is unconstitutional because it violates the “dormant Commerce Clause,” which prohibits states from enacting laws that discriminate against citizens of other states. According to the Complaint, Maryland’s laws discriminate against out-of-state applicants because, “[a]ll or nearly all students who attend college in Maryland will live in Maryland while school is in session … [and] … Maryland residents are more likely than out-of-state residents to have attended college in Maryland for at least two years.”  

The Plaintiff never lived in Maryland, but for two years attended a four-year institution of higher education in California, where 40% of attendees were eligible for a Pell Grant. The Plaintiff still sought to be qualified as a Social Equity Applicant in Maryland.  However, during a November 10, 2023, phone call, a contractor for the MCA informed the Plaintiff that “out of state universities do not qualify” for Social Equity criteria. The Plaintiff did not provide any information that she was qualified under the other criteria and the MCA was ultimately unable to verify the Plaintiff as a Social Equity Applicant. Therefore, the Plaintiff was ineligible to participate in the current round of licensing.

In light of this, the Complaint alleges that Maryland’s relevant laws and regulations “facially discriminate against out-of-state residents in violation of the dormant Commerce Clause of the United States Constitution,” and the MCA “violated Plaintiffs’ rights by depriving Plaintiff of the opportunity to participate in the lottery, in violation of the dormant Commerce Clause.” Accordingly, the Complaint seeks an injunction to prevent the MCA from processing the licensing applications submitted for the current round of licensing and an injunction to prevent the MCA from issuing any new adult-use cannabis licenses.

How Might this Lawsuit Impact the MCA’s Licensing Process?
The California-based attorney who filed suit against the MCA has also brought, or has been involved in, similar lawsuits in Los Angeles and Sacramento, California, Washington state, and New York against their cannabis licensing programs alleging that the social equity requirements discriminate against out-of-state applicants for cannabis licensing. In some of these cases, the California-based attorney has also been a minority stakeholder in a business entity applying for a license.  

Overall, these cases yielded mixed results. In 2023, New York’s cannabis regulators awarded a retail dispensary permit to a cannabis business whose majority stakeholder—a recurring plaintiff in similar cases—was not a New York resident, as part of a settlement. However, on February 2, 2024, in a separate lawsuit, a Federal judge in New York ruled against the plaintiffs (the California-based attorney, who has ownership in the entities, also served as counsel for the plaintiffs) alleging that New York’s cannabis-licensing requirements unfairly discriminate against out-of-state residents, in violation of the dormant Commerce Clause. Additionally, in January 2024, a Federal court in Washington state rejected a dormant Commerce Clause argument (Washington state has a six-month residency requirement) brought by a recurring plaintiff. A lawsuit filed by the same plaintiff challenging Los Angeles’s social equity lottery is currently stayed pending a decision from the Ninth Circuit Court of Appeals regarding the recurring plaintiff’s challenge to Sacramento’s residency requirements (oral arguments for the appeal were held on November 15, 2023). 

It remains to be seen if this latest in a string of lawsuits will halt the MCA’s process for reviewing or issuing licenses.

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Foley Hoag LLP - Cannabis and the Law

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