First Circuit Decision Could Disrupt Business Ownership in Cannabis Industry
Although the full implications of this decision are unclear, it is likely that it will force cannabis businesses to adapt to a new legal reality in which larger, out-of-state corporations can come into states that previously restricted ownership of cannabis businesses to residents. Below we discuss the First Circuit decision, the basis of its rationale and the consequences of this decision for the cannabis industry.
Like many states, Maine has a medical cannabis regulatory regime. And like many states, Maine’s statutes favor in-state owners of cannabis businesses (i.e., Maine residents). Under Maine statutes, all officers and directors of medical marijuana dispensaries must be Maine residents. In the case decided by the First Circuit, High Street Capital, a Delaware corporation owned by non-Maine residents, attempted to acquire a Maine for-profit dispensary, Northeast Patients Group. The resulting corporation would have been owned by non-Maine residents, violating Maine’s residency requirements for officers and directors of cannabis businesses. Together, the two companies sued the state, alleging that the residency requirement violates the Constitution—and they won. The First Circuit, affirming the district court below, held that Maine residency requirements violate the Dormant Commerce Clause of the Constitution.
Under Article I, Section 8, Clause 3 of the United States Constitution (the Commerce Clause), Congress has the explicit power to regulate interstate commerce. During the past hundred years, courts have explored the boundaries of the Commerce Clause, generally expanding the extent of this power, but some court watchers opine that it is on the chopping block of the current Supreme Court. The Dormant Commerce Clause is simply the inverse of Congress’s power to regulate interstate commerce under the Commerce Clause. If Congress can regulate interstate commerce, then by negative implication, the states cannot impose a substantial burden on interstate commerce.
In other words, they cannot act to privilege themselves at the cost of interstate commerce. For example, in 2019, the Supreme Court found that Tennessee could not require all stockholders of a corporation holding a license to operate an in-state liquor store to be residents of Tennessee. The question the First Circuit answered was whether the Dormant Commerce Clause applies to the cannabis market even though cannabis remains illegal under federal law. The answer was yes—meaning that Maine cannot discriminate against interstate commerce by requiring owners of cannabis dispensaries to be Maine residents.
First Circuit’s Rationale
The First Circuit reasoned that, even though cannabis is illegal at the federal level under the Controlled Substances Act, Congress has spoken with multiple voices regarding cannabis, tolerating the existence of the market under the Rohrabacher-Farr Amendment, which prevents the Justice Department from spending funds to interfere with states that have medical cannabis regimes. Absent Maine’s residency requirements, the court wrote, the cannabis market “is so robust that…it would be likely to attract entrants far and wide.” Quoting Alexander Hamilton, the court found that it cannot ignore the potential of a trade war between the states, suggesting that Congress has allowed the proliferation of state cannabis laws to crop up despite its earlier attempts to limit the market in the form of the Controlled Substances Act.
Therefore, Maine cannot interfere with interstate commerce by imposing a residency requirement. This is a significant expansion of the Dormant Commerce Clause into the cannabis space, where law professors have long suggested that the Dormant Commerce Clause must apply. The First Circuit said it was just bowing to reality—but of course, the fact that Maine created a marketplace for a substance illegal under federal law is an act to cultivate a trade war with other states. The presence of the banned commodity is the draw for other states’ residents. A dissent concluded that the Dormant Commerce Clause could not apply to a market already illegal under federal law.
Implications of First Circuit’s Decision
The immediate impact of this decision will be that out-of-state companies can now enter the cannabis market in Maine and buy local companies there. But many states with medical and recreational cannabis laws, like Maine, favor in-state residents owning cannabis businesses, so that the decision could have broader implications. The potential effects of this decision include the following:
- First, will the State of Maine seekcertiorarito the United States Supreme Court? Doing so could carry significant risks—the Supreme Court could rule that Maine’s entire medical cannabis regime is illegal under federal law. The dissenter in the First Circuit stated in a footnote that other courts have come to different conclusions about the Dormant Commerce Clause and that a circuit split could develop. The decision could also present the Supreme Court’s conservatives with a unique opportunity to limit Congress’s commerce power, which would permit states to favor residents for cannabis-business ownership.
- Second, Congress could intervene to permit states to favor residents subject to cannabis regulation explicitly. This, of course, would be a far cry from the federal overhaul in cannabis law that most agree is long past due.
- Third, states other than Maine with cannabis regulatory regimes may choose to rewrite their laws to comply with the decision, even if they are outside the First Circuit’s jurisdiction. Depending on the rules processes in different states, this could take significant time. Many states also include residency restrictions to avoid inviting large national cannabis conglomerates from coming in and dominating the market. They may need to find other ways to accomplish that end besides residency requirements.
The ongoing legal chaos surrounding cannabis regulation continues to evolve quickly. We encourage clients to monitor developments in the law on these issues closely. If you want more information about this decision or any other issues affecting the cannabis space, please reach out to the authors or any member of our Cannabis Practice Group.