Constitutional considerations for a federally illegal cannabis industry
- Law Firms
September 14, 2022 - As we wrote, repeatedly, in this column, the federal illegality of cannabis (with its simultaneous explosion of laws legalizing cannabis at the state level) creates many interesting challenges for practitioners, businesses, and state-level regulators. One of the most interesting developments to watch in recent years has been the proliferation of lawsuits targeting regulations, and licensing decisions, on constitutional grounds.
The two primary challenges are to regulations that allegedly violate the U.S. Constitution's dormant commerce clause by limiting licenses to state residents, and challenges to largely discretional licensing determinations under the due process clause. Recent decisions show that dormant commerce clause challenges may be far more viable in the long term. Indeed, some legal scholars predict that these early successes are only the beginning of the road.
Dormant commerce clause
Earlier this year, we flagged an appeal to the 1st U.S. Circuit Court of Appeals addressing the constitutionality of Maine's residency requirement for cannabis business owners and operators as one of the top cases to watch in 2022. Last month, a split 1st Circuit panel affirmed the district court's holding in Northeast Patients Group, et al. v. United Cannabis Patients and Caregivers of Maine et al., (2022 WL 3442203 (1st Cir. 2022)), striking down the state's residency requirement (which banned non-residents from owning or operating a state-licensed medical cannabis dispensary) as violative of the U.S. Constitution's dormant commerce clause, a constitutional doctrine limiting a state's power to enact laws touching on interstate commerce.
In upholding the district court's prior ruling, the 1st Circuit rejected the state's claim that the dormant commerce clause does not apply to state cannabis regulatory frameworks on the basis that Congress has suspended the doctrine, or because the dormant commerce clause does not apply to a market that remains illegal under federal law.
This is the first federal appellate court opinion addressing the constitutionality of state laws, such as Maine's, that bar or restrict non-residents from holding cannabis licenses, or investing in local cannabis businesses. This reasoning extends beyond Maine's law, as it is not unique in this regard. And, while the decision is binding only on states in the 1st Circuit (Maine, Massachusetts, New Hampshire, and Rhode Island), as well as Puerto Rico, the reasoning is likely to be persuasive to other courts.
As such, the implications of this decision are significant, especially for multistate operators (or MSOs) who are now able to point to federal precedent to challenge residency-based regulations for both medical and adult-use cannabis licensing. And, although the ruling does not immediately pave the way for interstate cannabis commerce, scholars like Robert Mikos (professor at Vanderbilt Law School and one of the leading experts on the intersection of federalism and cannabis), predict that such a challenge could be on the horizon.
Of course, finding a willing plaintiff could prove to be tricky since transportation of cannabis across state lines is one of the primary "red lines" in the so-called Cole Memorandum, which outlined enforcement policies for federal prosecutors. At the very least, the decision provides further support for the argument that legalization at the state level may not discriminate against out-of-state operators, even though cannabis remains illegal under federal law.
It should be noted that the cannabis industry is not a monolith. Not all industry participants welcome the 1st Circuit's decision, and some are concerned about what the decision means for the state markets. Advocates for increased social equity in the cannabis space are sounding the alarm about the implications of the 1st Circuit's ruling. Specifically, advocates are concerned that the decision calls into question the validity of many states' social equity policies. Those policies seek to prioritize cannabis license applicants that have been historically and disproportionately harmed by cannabis prohibition and the war on drugs. The 1st Circuit's ruling may mean that those policies are not sufficiently narrowly tailored to survive scrutiny under the dormant commerce clause analysis.
Unsurprisingly, the decision is already being challenged. Just two weeks after the decision was issued, the United Cannabis Patients and Caregivers of Maine, a cannabis trade group and intervenor-defendant in the case, filed a petition urging the 1st Circuit to grant rehearing en banc. United Cannabis argues in its petition that the majority erred in applying the dormant commerce clause to Maine's cannabis industry, an industry that remains illegal under federal law.
Due process clause
Due process challenges have been brought by license applicants who were not awarded a cannabis license. These types of claims typically allege that the applicant was unfairly deprived of a cannabis license or treated differently than other applicants who were awarded cannabis licenses. These applicants have found it harder to prevail under the due process clause of the U.S. Constitution.
Several decisions this year have confirmed that there is no procedural due process claim with respect to a license application because the federal right does not attach to the "process," but rather to property and no property right exists at the time of initial application. In other words, there is no procedural right to "process."
Two courts — the 11th U.S. Circuit Court of Appeals in Louis Del Favero Orchids, Inc. v. Rivkees, and the Michigan Supreme Court in Cary Investments LLC v. City of Mount Pleasant — reached essentially the same result earlier this year.
It should be noted that the district court in Del Favero initially held that a due process claim could not be advanced because the alleged property right was tied to the distribution of a federally prohibited narcotic. That is in line with older cases from other districts, like Grandpa Bud, LLC v. Chelan County Washington, from the Eastern District of Washington, which found that "[e]ven when cannabis production is a legitimate use of one's property at the state level, such use is not recognized as a protectable property interest under the U.S. Constitution" and, therefore, not amenable to a due process claim.
In affirming dismissal of the complaint, the 11th Circuit specifically sidestepped this issue, noting that it was not opining on whether the determination was right or wrong. Instead, it was arriving at the same conclusion — that no violation of federal due process occurred — because the plaintiff had no procedural right in the license award "process."
A month later, in July of 2022, the Michigan Supreme Court arrived at the same conclusion under both the federal and Michigan constitutions in Cary Investments LLC v. City of Mount Pleasant. Relying on cases decided in the liquor license context, the court noted that a first-time applicant is not entitled to even minimal due process because no property right attaches (and as a result the due process analysis is not triggered).
Under such circumstances, determinations of the issuing agency (or municipality) are subject to the extremely deferential arbitrary and capricious standard. The court therefore concluded that "the right to due process guaranteed by the United States Constitution and the Michigan Constitution of 1963 does not empower courts to micromanage the decision-making of governmental entities."
Like the 11th Circuit, the Michigan Supreme Court did not grapple with federal illegality at all. If the reasoning of Cary Investments is adopted in other states (which have developed a similar body of law in the liquor license context, for instance), it may prove to be a real hurdle to unsuccessful applicants.
In any event, the intersection of constitutional law and state-level cannabis legalization will continue to be an extremely interesting area to watch.
Alex Malyshev and Sarah Ganley are regular, joint contributing columnists on legal issues in the cannabis industry for Reuters Legal News and Westlaw Today.