Courts could throw state marijuana markets into disarray

Some states have carefully crafted their cannabis programs to meet goals beyond legalization: Many prioritize licenses for entrepreneurs of color and those hurt by the war on drugs. But these programs often rely on residency requirements — a condition a federal court recently ruled unconstitutional.

The ruling also imperils testing and packaging rules designed to bolster public safety.

The 2-1 opinion by the 1st Circuit Court of Appeals was focused on Maine’s medical marijuana program, but many experts believe the same legal justification could open up interstate commerce nationwide. And two prior federal court rulings also struck down residency requirements as unconstitutional.

“This [decision] really portends the emergence of a national market in cannabis,” said Robert Mikos, a Vanderbilt legal scholar and expert on federalism and drug laws. “We will see changes to state import and export bans.”

Some states are already maneuvering to prepare for a potential national weed market.

California Gov. Gavin Newsom signed a bill earlier this month that would allow the state to enter into agreements with other states to regulate the import and export of cannabis products. Oregon passed a similar bill in 2019, and New Jersey is considering legislation to do the same.

The prospect of courts wreaking havoc in state-legal markets has many advocates arguing that it’s far past time for Congress to step in and overhaul federal cannabis policies to reflect the current legalization landscape.

“Consumer safety is in jeopardy if [those rules] are struck down,” said Andrew Kline, senior counsel at Perkins Coie and a former policy director for the National Cannabis Industry Association. “That’s not good for consumers. I don’t think businesses want that either.”

Dormant Commerce Clause

The Commerce Clause of the U.S. Constitution gives Congress the power to regulate interstate and international commerce. The dormant Commerce Clause — the legal doctrine used to strike down Maine’s residency requirement — is the flip side of the Commerce Clause. It bars states from discriminating against or burdening interstate commerce.

Maine’s medical marijuana law requires that all “officers or directors” of a dispensary are residents of the state. Multi-state marijuana operator Acreage Holdings sued the state over the requirement after the planned acquisition of a Maine medical marijuana dispensary ran afoul of the residency rule.

United Cannabis Patients and Caregivers of Maine, a coalition of small medical marijuana caregivers, intervened in the case, in hopes of preserving the dominance of small operators in the medical marijuana program. About 75 percent of medical marijuana sales in Maine are conducted by small operators, said James Monteleone, the attorney who represented the coalition in the case.

His clients are “hoping to preserve what was intended to be some manner of economic protection in this market,” he said.

At a time when both progressive marijuana advocates and anti-legalization activists are raising alarms about increasing corporate dominance in the market, the prospect of interstate commerce has advocates of all stripes debating when and how that trade should come about.

The 1st Circuit isn’t the only court to come down against residency requirements.

In June 2021, a federal court in Michigan ruled against the city of Detroit in a challenge to its proposed licensing scheme that favored longtime city residents. In November 2021, a federal court in Missouri struck down the state’s residency requirement for ownership in medical marijuana companies.

Both courts cited the dormant Commerce Clause in their rulings on the issue.

Courts in the ‘drivers’ seat’

So far, marijuana legalization has been dealt with at the ballot box by voters and through state legislatures.

“The courts have played a pretty subdued role,” Mikos said. But unless Congress steps in on the issue of the dormant Commerce Clause and marijuana, “the courts will be in the drivers’ seat and the states will have to deal with that.”

That could pose problems for existing state programs, which have sprung up in an isolated fashion. Every state has set up its regulated market differently, from taxes to lab testing to advertising.

Some states have mandatory vertical integration, meaning that a single company must grow, process, manufacture, distribute and sell marijuana products. Other states ban the practice in hope of dissuading industry consolidation.

If federal courts declare that states can’t ban the import and export of weed over state lines, companies are likely to start challenging state regulations on things like labeling and packaging.

Legal experts are also concerned about a race to the bottom. If the courts open up a national market, companies can just pick up and move to states with the most lenient regulations when it comes to public health, environmental laws and labor regulations.

“As hard as it is to comply with 38 different state rules, at least you know what the rules are,” said Kline. “If we start unwinding them and there’s uncertainty in the marketplace, that’s not good for business either.”

While several legal experts agreed that the 1st Circuit ruling could lead to the opening up of interstate markets, Matthew Warner, the attorney who represented Acreage in the case, cautioned against over-interpreting the ruling.

“A lot of these concerns are red herrings because states just don’t have that much authority here,” Warner said. “At the end of the day, it’s going to be up to Congress to pass the broader laws.”

Threat to social equity

Cities and states across the country are increasingly focusing on standing up social equity programs, which are aimed at repairing the racially disparate harms of drug enforcement. These programs, which include priority licensing schemes, typically have certain residency requirements based on marijuana enforcement rates.

While the ruling won’t likely have any impact on existing social equity programs, it does take a step toward threatening Massachusetts’ social equity efforts. Massachusetts is the only state in the 1st Circuit’s jurisdiction with a state-wide social equity program that has a residency component.

And the legal basis for the ruling could be used to strike down similar programs across the country, from California to Colorado to New York.

“Is there an alternative way of identifying people harmed by the drug war, without discriminating against non-residents?” said Shaleen Title, a drug policy expert and former Massachusetts cannabis regulator. “You could consider drug convictions, poverty [and] unemployment.”

Looking ahead

The coalition of caregivers in Maine petitioned the court for a rehearing, which would have given all nine judges on the court a chance to weigh in. But the 1st Circuit denied their petition last week.

In the petition, the intervenors argued that the dormant Commerce Clause was applied erroneously to the marijuana market, citing one judge’s dissenting opinion in their case.

“The national market for marijuana is unlike the markets for liquor licenses or egg products in one crucial regard: it is illegal,” read the dissenting opinion.

The caregivers argued that no lawful national marijuana market exists, so Maine’s regulation of its in-state market does not violate the dormant Commerce Clause.

Monteleone said the intervenors weren’t sure at this point whether they would try to seek an audience with the U.S. Supreme Court.

Still, if the dormant Commerce Clause doesn’t apply to marijuana because it’s a federally illegal industry, it raises questions about other federal laws.

“It gets into this shady area,” said Benjamin Stelter-Embry, an attorney who represented the plaintiff in the case that struck down Missouri’s residency requirement. “Does that mean those companies don’t have to comply with the American Disabilities Act? Or Title 7, which prohibits employment discrimination? OSHA?”

Meanwhile, some advocates are working on setting up interstate marijuana agreements at the state level.

Adam Smith, founder of the Alliance for Sensible Markets, believes that this approach will allow states to keep their regulatory frameworks and develop an interstate marijuana trade that helps small businesses.

“It’s a more controlled, more predictable way for commerce to emerge [rather than] having siloes torn down by the courts,” Smith said.

Others are calling on Congress to weigh in — fearing that courts will continue on this path, threatening state regulations and social equity efforts.

“Congress should use its robust power to regulate interstate commerce to benefit disproportionately harmed people and small businesses,” Title said.

For example, Congress could authorize states to continue their social equity programs after legalization, or they could create a transition period where states could continue to ban out-of-state commerce for a certain number of years, she explained.

“That would allow a gradual transition and the opportunity for data collection,” Title said. “That way, regulators could course correct.”

Flipping the switch on interstate commerce all at once, Title said, could usher in Amazon and tobacco companies to dominate the national market.

“What we need is Congress not to say ‘Yes’ or ‘No’ but rather to develop a plan for interstate commerce,” she said.