Alert

Maybe You Can Play In the Sandbox If You Don’t Live in the Neighborhood – Have Marijuana Residency Licensure Requirements Gone Up In Smoke?

August 19, 2022

For a variety of reasons, many states that have legalized recreational or medical marijuana have imposed residency requirements throughout their regulatory schemes, meaning that marijuana license holders, employers, and, in some cases, even consumers, must be residents of the state. However, a recent decision from a divided three-judge panel of the U.S. Court of Appeals for the First Circuit has put these residency requirements in jeopardy by holding that Maine’s residency requirement for marijuana business license holders violates the dormant Commerce Clause of the U.S. Constitution. Northeast Patients Grp. v. United Cannabis Patients and Caregivers of Maine, 1st Cir., No. 21-1719, 8/17/22.

The case involved Maine’s Medical Use of Marijuana Act’s residency requirement for dispensary officers and directors. The relevant provision of the law provides that for a dispensary to be authorized under state law to sell medical marijuana in Maine, “all [the] officers or directors of a dispensary must be residents of [Maine].”

The law was challenged as a violation of the Commerce Clause contained in Article I, Section 8, Clause 3 of the U.S. Constitution. Throughout the last 100 years, United States Courts have developed a legal doctrine under the Commerce Clause referred to as the dormant Commerce Clause (or, the negative Commerce Clause). This doctrine focuses on barring state protectionism. In practice, it is used to strike down and prohibit state legislation that discriminates against, or unduly burdens, interstate or international commerce.

The Northeast Patients case arose because High Street Capital, a Delaware corporation owned exclusively by non-Maine residents, wanted to acquire Northeast Patients Group, a Maine corporation owned by three Maine residents which owns and operates three licensed marijuana dispensaries in Maine. The residency requirement would have precluded High Street Capital from operating the dispensaries if it acquired Northeast Patients Group. Northeast Patients Group and High Street Capital (plaintiffs) sued the Maine Department of Administrative and Financial Services (Department) and Kirsten Figueroa, Commissioner of the Maine Department of Administrative and Financial Services, alleging that Maine’s residency requirement violated the dormant Commerce Clause because the law permitted only in-staters to serve as officers or directors of dispensaries.

Shortly after the defendants answered the complaint, United Cannabis Patients, a nonprofit advocacy group that represents medical marijuana businesses owned by Maine residents, moved to intervene in the action as a defendant.

The plaintiffs filed a motion for summary judgment and the defendants filed a cross-motions for summary judgment. While the District Court granted judgment in favor of the Department on the grounds that the Department was immune from suit under the Eleventh Amendment of the U.S. Constitution, the District Court held with respect to the plaintiffs’ claims against defendant Kirsten Figueroa, the Commissioner of the Department, that Maine’s residency requirement violated the dormant Commerce Clause.

On appeal, the defendants did not dispute that Maine’s residency requirement would violate the dormant Commerce Clause if the business were a legal business under Federal law, which marijuana businesses are currently not. They argued, instead, that Maine’s residency requirement comports with the dormant Commerce Clause because the current controlling Federal law (that is, the Controlled Substances Act or “CSA”) makes participation in the market to which the residency requirement applies illegal. The appeals court said, “[i]t is that contention – and that contention alone – that we must address.”

In setting the stage for its analysis of this issue, the court stated:

. . . it is important to keep in mind that the question before us is not whether the CSA preempts the residency requirement in the Medical Marijuana Act. It is whether the residency requirement cannot stand because it transgresses the dormant Commerce Clause due to the substantial burden that this requirement (in light of its patently protectionist nature) imposes on interstate commerce.

This distinction matters because preemption by a federal statute and prohibition by the dormant Commerce Clause are distinct rather than coterminous means by which federal law may limit state lawmaking that substantially burdens interstate commerce. Thus, the negative implication of the commerce power may pose an independent bar to a state regulation of an interstate commercial market even when Congress chooses to exercise its affirmative commerce power with respect to that same market without also preempting that state regulation.

In other words, although the CSA makes it illegal to manufacture, distribute, or dispense, or possess with intent to manufacture, distribute, or dispense, marijuana, the panel majority rejected the argument that Congress, by enacting the CSA, showed an intent to consent to state residency requirements. Had the panel majority found such an intent, it presumably would have held that the residency requirement comports with the dormant Commerce Clause.

The dissent finds the dormant Commerce Clause inapplicable to a market that Congress has lawfully proscribed:

It follows that, in the market for legal goods and services in the stream of interstate commerce, the dormant Commerce Clause renders unconstitutional a state’s preferential treatment of its residents, absent Congress’s “unmistakably clear intent to allow otherwise discriminatory regulations.” This is because the law presumes the public interest is best served by maintaining an unencumbered “national market for competition” in legal goods and services . . . However, it makes little sense to retain this presumption when Congress has explicitly acted to make the market in question illegal, because the premise that the dormant Commerce Clause enshrines . . . does not hold. The Commerce Clause does not recognize an interest in promoting a competitive market in illegal goods or services or forestalling hypothetical interstate rivalries in the same.

For now, any residency requirements for marijuana businesses (recreational or medical) in states within the jurisdiction of the United States Court of Appeals for the First Circuit (Maine, Massachusetts, New Hampshire, Puerto Rico, and Rhode Island) are unconstitutional. The dissent suggests other Federal Circuit Courts may find residency restrictions constitutional. Ultimately, if states continue to resolve the issue in various ways and come to opposite conclusions with respect to the constitutionality of residency requirements, the Supreme Court may have to resolve this issue by providing for a single uniform rule regarding residency requirements for marijuana businesses that will be applicable across all of the states.