UPDATE: Federal Judge Finds that State Residency Requirements for Marijuana Licensing are Unconstitutional
As I blogged in the summer, Maine has become a hotbed of litigation concerning residency requirements for marijuana licenses. Many states (including Maine, for a time) limit the ability of non-residents to own and operate marijuana businesses.
The litigation began when a Delaware firm (Wellness Connection) challenged a provision of Maine’s new recreational marijuana law that required all marijuana license applicants to be Maine residents. See Company Sues Maine for Discriminating Against Non-residents When Licensing Marijuana Businesses. After that suit was filed, and on the advice of the Maine Attorney General, the state licensing agency dropped the residency requirement. See UPDATE: Maine Drops Residency Requirement for Adult-Use Commercial Licenses, Moots Legal Challenge. The state Attorney General agreed that the residency requirement is a form of protectionism barred by the Dormant Commerce Clause doctrine.
However, the state’s disavowal of the residency requirement did not end the litigation in Maine, for two reasons.
First, a group of residents (United Cannabis Patients and Caregivers of Maine), threatened by the out-of-state competition, sued the state licensing agency, demanding that the agency re-instate the residency requirement. Locals Sue, Seeking to Force Maine to Re-instate Residency Requirement for Marijuana Licenses. I do not have any updates to report on that case, though as I pointed out in my earlier post, I doubt the suit will be successful.
Second, notwithstanding the state’s decision, the City of Portland decided to impose its own residency favoritism. Maine allows local governments to license (and even ban) recreational marijuana businesses. By ordinance, Portland decided to award 20 licenses to operate recreational marijuana stores in the city. In the event that more than 20 firms applied for these licenses, the city created a scoring matrix, under which it would points for business acumen (e.g., “experience running a business in a highly regulated industry”), but also for being a Maine resident. Although it was not a residency requirement, Portland’s ordinance awarded as many as 9 points out of 34 based on residency and residency-like criteria.
Wellness Connection, the Delaware company that helped bring down the Maine residency requirement, sued the City of Portland in federal court, challenging the city’s residency preferences. In mid-August, the federal District of Maine ruled in favor of Wellness, basically ordering the city to stop using the residency criteria when scoring applications for its 20 recreational marijuana licenses. The court found that the residency requirement violates the Dormant Commerce Clause. In so doing, it rejected an argument I had suggested the state might have made to try to defend the statewide residency requirement – namely, that the Dormant Commerce Clause does not apply because Congress has forbidden the commerce at issue.
Here are the relevant excerpts from the court’s opinion in Wellness Connection v. Portland injunction (Aug 14, 2020)(full decision), which also nicely summarizes the doctrine:
[The] ‘dormant Commerce Clause’ prohibits ‘protectionist state regulation designed to benefit in-state economic interests by burdening out-of-state competitors.’ . . . The dormant Commerce Clause is intended ‘to effectuate the Framers’ purpose to prevent a State from retreating into the economic isolation . . . that had plagued relations among the Colonies and later among the States under the Articles of Confederation.’ . . .
To this end, a state or local law that ‘discriminates on its face against interstate commerce, whether in purpose or effect, demands heightened scrutiny.’ . . . I must invalidate such a law ‘unless it furthers a legitimate local objective that cannot be served by reasonable non-discriminatory means.’ (page 18)
Portland conceded the “discriminatory character of [its] residency preference factors” (Page 21). Such a concession would normally be fatal. However, Portland made two inter-related arguments suggesting that the normal rules of the Dormant Commerce Clause do not apply to marijuana licensing.
First, Portland claimed that the federal ban on commercial marijuana activities signaled that Congress approved of state discrimination in the marijuana market. (Page 21) Portland’s premise – that Congress may authorize (some) state discrimination against non-residents – is sound. As the court explained:
[C]ongressional action can alter the application of the dormant Commerce Clause. As the Supreme Court recently stated, ‘[d]ormant Commerce Clause restrictions apply only when Congress has not exercised its Commerce Clause power to regulate the matter at issue.’ . . . Thus, Congress ‘may use its powers under the Commerce Clause to ‘[confer] upon the States an ability to restrict the flow of interstate commerce that they would not otherwise enjoy.’’
Critically, however, the “standard for finding such congressional consent is ‘high,’ and the state or local jurisdiction has the burden of demonstrating Congress’s ‘unmistakably clear intent to allow otherwise discriminatory regulations.’ (Page 19) The court held that Portland failed to meet its lofty burden:
The City portrays the Controlled Substances Act as a form of congressional consent. . . . But the Act nowhere says that states may enact laws that give preference to in-state economic interests. In other words, although the Controlled Substances Act criminalizes marijuana, it does not affirmatively grant states the power to ‘burden interstate commerce ‘in a manner which would otherwise not be permissible.’ (Page 22)
Second, Portland argued that “marijuana is ‘contraband’ and thus sales of marijuana do not enjoy dormant Commerce Clause protections.” (Page 21, n. 11). In other words, the city argued that the Dormant Commerce Clause does not apply to state marijuana regulations.
But as the court noted, “here, the City is actively and voluntarily creating a market for recreational marijuana retail sales.” (Id.) The judge declared that she was “unpersuaded that the City can legalize and promote marijuana sales on the one hand, while simultaneously labeling marijuana as contraband in order to justify discrimination against nonresidents who seek to participate in the market.” (Id.)
I think the court is correct — it’s a close case, but I think the Dormant Commerce Clause should apply to state marijuana regulations. However, I wish the court had elaborated upon this point, and not relegated it to a footnote. That’s because the court’s reasoning could have implications far beyond the Dormant Commerce Clause and residency preferences. Indeed, there are many situations where a legalization state might be tempted to hide behind federal law to defend some otherwise questionable state restriction – e.g., state bans on commercial advertising of marijuana. If the court is correct that a state cannot use the federal ban to defend its own regulations, these other restrictions could be (more) vulnerable as well.
Once the court found that the normal Dormant Commerce Clause doctrine applies, the city’s chances of defending its residency preferences were vanishingly small. The city would have to show that there was a legitimate (i.e., non-protectionist) purpose for the residency preference and that there was no other way to serve this purpose. It appears the city suggested that “the reason for the local preferences ‘was to ensure that the City understood the amount and quality of oversight and could easily verify any past violations’” (Page 24). In other words, it seemed to suggest that it would be easier to supervise local firms rather than out-of-state firms operating in the marijuana market. However, the court found the city’s argument was “undeveloped” and “unsupported”, and thus, could not carry the day. (Id.)
In short, Wellness Connection wins, again.