Marijuana Law, Policy, and Authority

Company Sues Maine for Discriminating Against Non-residents When Licensing Marijuana Businesses

Posted by on Thursday, April 2, 2020 in News, Updates.

A Delaware corporation (Wellness Connection) has sued Maine, challenging a provision of that state’s recreational marijuana law that bars out-of-state companies and non-resident investors from obtaining commercial marijuana licenses. The suit was filed on March 20, 2020, in the U.S. District Court for the District of Maine. The story has been reported in local papers here (Bangor Daily News) and here (Press Herald), though both may require subscriptions to access. The full complaint in the lawsuit (it’s only 12 pages long) is here: Wellness Connection v. Maine complaint .

Even though Maine legalized recreational marijuana back in 2016, the state still has not issued licenses to serve the recreational market (it does have an established medical marijuana industry). This lawsuit could potentially push back the start of Maine’s recreational marijuana industry even further.

In this post, I’ll describe the lawsuit, its merits, and two defenses the state might raise to defeat it. The book discusses state discrimination against non-residents on pages 283-288. For a more thorough discussion of the relevant doctrine and background, I highly recommend Brannon Denning’s excellent piece, One Toke Over the (State) Line: Constitutional Limits on ‘Pot Tourism’ Restrictions, 66 Fla. L. Rev. 2279 (2014). It is excerpted in the book.

1. The lawsuit alleges a straightforward violation of the Dormant Commerce Clause.

The legal provision Wellness has challenged declares that:

“2. Resident. If the applicant [for a license] is a natural person, the applicant must be a resident. If the applicant is a business entity:

A. Every officer, director, manager and general partner of the business entity must be a natural person who is a resident; and . . .
B. A majority of the shares, membership interests, partnership interests or other equity ownership interests as applicable to the business entity must be held or owned by natural persons who are residents or business entities whose owners are all natural persons who are residents.
. . .

3. Incorporated in State. If the applicant is a business entity, the business entity must be incorporated in the State or otherwise formed or organized under the laws of the State.”

28-B Maine Revised Statutes § 202(2)-(3).

Wellness’s complaint levies a single, straightforward challenge to Section 202. Wellness claims the provision discriminates against non-residents and thus violates the dormant Commerce Clause.

The complaint includes a nice summary of the claim:

“2. Though Maine’s adult use marijuana industry is expected to create significant economic opportunities, a state statute reserves these opportunities in large part for four-year Maine residents, to the exclusion of non-residents. Under 28-B M.R.S. § 202(2) (the “Residency Statute”), non-residents are prohibited both from receiving adult use marijuana licenses and from owning a majority of any Maine company that holds an adult use license.
3. The purpose of the Residency Statute is to discriminate against non-residents. The Department of Administrative and Financial Services has declared on its website that Maine’s marijuana program is designed to “[e]nsure that economic opportunities afforded by marijuana legalization is [sic] available chiefly for the citizens of Maine.”
4. The Residency Statute violates the dormant Commerce Clause of the United States Constitution by explicitly and purposefully favoring Maine residents over non-residents. Before legal sales of adult use marijuana begin in Maine, the Court should enjoin the Defendants from enforcing the Residency Statute. This is the only way to ensure that residents and non-residents alike, including Plaintiffs, are able to participate in Maine’s adult use marijuana industry.

. . .

6. Wellness and Pain Management Connection, LLC (“WPMC”) is a Delaware Corporation. More than 95 percent of WPMC’s membership interests are owned by non-Maine companies which are, in turn, largely or entirely owned by non-Maine residents. . . . Unless enforcement of the Residency Statute is enjoined, WPMC will be unable to receive an adult use license in Maine.”

Complaint pp. 2-3.

So does the suit have merit? In a nutshell, the Dormant Commerce Clause (DCC) bars states from erecting trade barriers designed to protect local economic interests from out-of-state competition. Like preemption, the DCC serves to block the operation of a state law. Unlike preemption, however, the DCC normally applies when Congress hasn’t legislated – i.e., when its power to regulate interstate commerce is dormant. As noted below, courts recognize that Congress can override the basic default rules of the DCC through legislation, and this might provide Maine with a defense.

The test courts apply to assess the constitutionality of discriminatory state laws – strict scrutiny — is particularly difficult to satisfy. It requires the state to identify a legitimate purpose that cannot be served by any other, non-discriminatory state law.

Back to the Wellness’s suit. It seems clear to me that Section 202 discriminates against non-residents. It expressly reserves a valuable commercial opportunity for state residents. This means that strict scrutiny should apply.

What is more, I doubt the state could satisfy strict scrutiny (states very rarely can satisfy this demanding test). For one thing, protecting local businesses from competition – the purpose Wellness attributes to Section 202 – is NOT a legitimate state interest for purposes of the DCC. In fact, such protectionism is the “evil” the DCC is designed to address. In any event, even if Maine were able to articulate some other, more legitimate interest – say, preventing Maine-sourced marijuana from being diverted into the black market in other states – it’s difficult to see why limiting ownership of Maine-licensed suppliers is the only way Maine can serve that interest. After all, Maine could try other, less discriminatory measures – like limiting volume sales to consumers or locating shops away from the state’s borders – to combat that problem.

Thus, if this were any other industry, I am confident the court would invalidate Maine’s law under the DCC. But let me suggest two arguments Maine could raise to escape that conclusion and salvage Section 202.

2. Does the DCC even apply to marijuana licensing?

For one thing, Maine could argue that the DCC does not protect Wellness from state discrimination because federal law bans all commerce in marijuana.

A similar argument has foiled state-licensed marijuana businesses from asserting other federally created rights. For example, courts have held that state licensed marijuana suppliers cannot assert the protections afforded by the federal Bankruptcy Code because they are engaged in an unlawful business. Likewise, at least one court has held that state licensed marijuana suppliers have no First Amendment right to advertise their wares so long as federal law bans sales of marijuana (the book discusses the First Amendment issues raised by state advertising restrictions on pages 501-504).

I am not aware of any case specifically addressing whether the DCC applies to commerce that Congress has banned altogether (alcohol Prohibition may provide an example), but Brannon Denning makes a similar point regarding a related doctrine – the Privileges and Immunities clause. Like the DCC, the Privileges & Immunities Clause bans state discrimination, but only regarding certain rights that are recognized under federal law. And as Denning points out, selling marijuana isn’t (yet) one of those recognized rights.

I’m not sure where I come out on this particular defense. On the one hand, it would be strange to say that a state violates the DCC when Congress has banned the relevant commerce altogether. On the other hand, it would also be strange to say that a state could arrest non-residents for selling marijuana while it allows its own residents to engage in the very same conduct (regardless of what federal law may say about it).

3. Has Congress authorized state discrimination?

Maine could also potentially invoke a second defense against Wellness’s lawsuit. The courts have recognized that Congress may override the default rules they have created for the DCC. For example, in Northeast Bancorp, Inc. v. Federal Reserve, 472 U.S. 159 (1985), the Supreme Court declared that “When Congress so chooses, state actions which it plainly authorizes are invulnerable to constitutional attack under the Commerce Clause.” Among other things, this means that even blatantly discriminatory state laws may be upheld if Congress has authorized states to discriminate against non-residents in a given market.

Here, Maine could argue that Congress has authorized states to discriminate against outsiders in the marijuana market. After all, when Congress passed the Controlled Substances Act, one of its primary objectives was to quash interstate commerce in illicit drugs like marijuana. Indeed, even when the federal Department of Justice has disclaimed interest in enforcing the CSA’s ban on marijuana, it has warned that stopping interstate shipments of the drug remains a federal enforcement priority.

Maine could try to argue that Congress would approve of barring outsiders from entering its marijuana market, because it serves the CSA’s purpose of quashing inter-state commerce in the drug (at least in a weak way). To be sure, there might be other, less discriminatory ways Maine could do this (as noted above). But that may not matter for purposes of this defense. The state doesn’t have to satisfy the courts’ strict scrutiny test; rather, the state just has to convince the court that Congress has approved of its effort to keep outsiders out of its marijuana market.

There’s no guarantee the court will buy this argument – to invoke this particular exception to the DCC, courts commonly require a clear indication of congressional approval of state discrimination. But I think it’s a reasonable argument for Maine to make.

H/t August Fest for drawing my attention to the suit.

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