How US Constitution’s Dormant Commerce Clause Is Challenging Marijuana Legislations

A number of U.S. states that have legalized the sale of marijuana are being sued by companies that have not entered the legal market, using the Constitution’s dormant commerce clause as their basis for the lawsuits.

While the majority of U.S. cannabis legislation aims to regulate the sector and include social equity applicants in the industry, some parts of these policies have been ruled as unconstitutional by courts when marijuana-related businesses excluded from the state market have invoked the Constitution’s dormant commerce clause. This may lead state legislators to revise their marijuana regulations so as not to exclude nonresident applicants from participating in the state industry.

U.S. Constitution’s dormant commerce clause is a doctrine of constitutional law interpreting the interstate commerce clause of the U.S. Constitution. It aims to prevent states from enacting protectionist measures and therefore prohibits them from adopting policies that obstruct the free flow of goods, people, or capital within the country.

However, the application of the dormant commerce clause to the marijuana industry has negatively impacted state regulations.

Adult-use marijuana is still illegal at the federal level, and interstate commerce between the states that have regulated the industry is not allowed, as also noted in the so-called Cole Memorandum issued by the Obama Administration in 2013 in the part in which it indicated “preventing the diversion of marijuana from states where it is legal under state law in some form to other states.”

Nevertheless, some marijuana-related businesses believe that certain aspects of the marijuana regulations set in place to enter the state industries are unconstitutional because they discriminate against interstate commerce.

One of the first case studies on the matter took place in Maine, in which the 1st Circuit Court of Appeals ruled in a 2-1 decision in August that the state’s law prohibiting nonresidents from owning medical marijuana companies was unconstitutional. In that case, the First Circuit rejected the argument that the dormant commerce clause doesn’t apply to state cannabis regulatory frameworks because Congress suspended the doctrine or the market remains illegal under federal law.

In November, Jefferson Packing House, a licensed Oregon distribution company, filed a lawsuit against Oregon state officials. The lawsuit challenges a section of Oregon law that prohibits state-licensed marijuana operators from transporting marijuana across state lines, arguing that this prohibition is unconstitutional.

But the use of the dormant commerce clause could also affect social equity programs.

An example of this is New York, whose regulators launched a Conditional Adult-Use Retail Dispensary (CAURD) program in September, which was specifically intended for social equity applicants who had been negatively impacted by the war on drugs and who had operated a successful business for at least two years with a significant presence in the state.

However, the Michigan-based corporation Variscite has filed a federal lawsuit that may delay the issuance of dispensary licenses in five regions of New York. Variscite applied for the CAURD program through its New York-based cannabis company, Variscite NY One, but it was rejected due to the owner’s criminal conviction in Michigan and lack of significant presence in New York. In response, Variscite requested a preliminary injunction to prevent cannabis regulators from issuing CAURD licenses in certain parts of the state. Variscite argues that the CAURD program is unconstitutional because it unfairly favors in-state operators and obstructs interstate commerce, and the dormant commerce clause prohibits state and local governments from granting preferential treatment to local citizens over residents of other states.

Variscite also initiated legal action in California and filed a license application in Los Angeles under the city’s social equity program. When the application was denied, Variscite filed a lawsuit, and a federal judge ruled that state regulators were not allowed to issue adult-use marijuana retail licenses until the legal action had been resolved.

As a result, the cannabis regulators in Los Angeles had to accept a further 100 social equity applicants for cannabis retail licenses after a U.S. district judge declined to halt the lottery selection. In addition, Variscite also filed a lawsuit challenging the social equity program in Sacramento, California.

Other businesses filed lawsuits related to residency requirements for applying for such programs in other states, including Michigan, Missouri, and Oklahoma.

Alex Malyshev, a partner at Carter Ledyard & Milburn LLP and the chair of its Cannabis, Hemp & CBD Industry Group, explained that all individuals and the companies that they operate have the constitutional right to invoke the dormant commerce clause of the U.S. Constitution. Additionally, the fact that marijuana is still illegal at the federal level does not affect this right.

“Those policies may need to be rewritten in a way that does not favor their own residents. If these challenges are upheld, social equity programs will need to focus more on social equity for all Americans impacted by the war on drugs. Regulators can consider certain specific requirements, but they cannot limit people affected by the war on drugs only to those affected in their own state. In this context, the dormant commerce clause does not allow discrimination between people who are similarly impacted by the war on drugs solely based on where their conviction occurred,” he said.

However, using the dormant commerce clause may put social equity programs at risk by halting marijuana regulators from issuing licenses destined for people affected by yearslong prohibition policies.

Malyshev explained that the use of the dormant commerce clause may jeopardize social equity programs that have not yet been implemented, while companies that have challenged the program will not be able to benefit from it.

While states that have legalized and regulated marijuana may have good intentions to create a specific program to help social equity applicants impacted by prohibitionist policies join the industry, the regulations may contain certain protectionist elements that could jeopardize the program itself.

“The question is whether regulators go too far and violate any constitutional principles. In that case, courts will closely examine the issue and evaluate it using a test that considers whether the regulations are narrowly tailored enough to be considered constitutional. Simply favoring state residents does not automatically make the regulations unconstitutional. However, there is a very strict test that is difficult to pass if that is what regulators do,” Malyshev explained.

Some businesses in the marijuana industry have used the dormant commerce clause to engage in interstate commerce. However, it is unlikely that such companies will be able to continue this activity in the near future due to the presence of laws prohibiting the export of cannabis in many states. These laws could potentially be challenged as unconstitutional, but this would still be a significant obstacle for businesses to overcome.