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Did Federal Judge Give Oklahoma a Free Pass to Violate the Constitution?

Posted by on Thursday, June 10, 2021 in News, Updates.

On June 4, 2021, a federal judge dismissed a lawsuit challenging Oklahoma’s residency requirement for commercial cannabis licenses. The full decision in Original Investments v. Oklahoma is here: Original Investments v. Oklahoma (W.D. Okla. June 4, 2021) (it’s only about 5 pages long).

The suit claimed that Oklahoma’s residency requirement violated the Dormant Commerce Clause (DCC). The DCC is one of the hottest issues in cannabis law right now. To simplify, the doctrine bars states from protecting local firms from outside competition. To date, states like Oklahoma have assumed that the DCC doesn’t apply to cannabis. Acting on this assumption, every state has banned imports of cannabis produced in other states, and most states have also barred non-residents from owning local cannabis firms.

But this assumption is now being challenged in several states. Out-of-state firms and investors have filed lawsuits challenging residency requirements for cannabis licensing in Maine, Michigan, Missouri, Oklahoma, and Washington. The plaintiff in one of these suits has already scored a victory. As I blogged about earlier, a federal court in Maine recently held that Portland’s residency preferences for cannabis licenses violated the DCC. See UPDATE: Federal Judge Finds that State Residency Requirements for Marijuana Licensing are Unconstitutional. I’ve also just published a law review article that delves into the DCC issues more deeply. See Robert A. Mikos, Interstate Commerce in Cannabis, 101 Boston University Law Review __ (forthcoming May 2021).

In this post, I’ll briefly summarize the Original Investments opinion (the latest decision from these lawsuits), and then I’ll provide a few tentative reactions to that decision.

Original Investments (OI) is a Washington based firm owned by Washington residents. OI wanted to enter the booming Oklahoma medical marijuana market, but it was precluded from doing so by a provision of Oklahoma’s medical marijuana law. Namely, 63 Oklahoma Stat. section 427.14E(7) bars non-residents (like OI) from obtaining commercial marijuana licenses from the state, and it also bars them from owning more than 25% of any state-licensed marijuana business. Thus, back in August 2020, OI sued Oklahoma and various state officials in federal court (the Western District of Oklahoma), claiming that the state’s residency requirement violated the DCC. It asked the court for a declaration to that effect and for an injunction barring the state from enforcing the requirement.

Crucially, the court did not reach the merits of OI’s DCC claim. Instead, it dismissed OI’s lawsuit based on the nebulous clean hands doctrine – the notion that a court “won’t use its equitable power to facilitate illegal conduct.” (Original Investments, p. 2) In particular, the court was troubled that “Plaintiff invokes the court’s equitable powers to facilitate activity that is illegal under federal law. Absent the relief plaintiff seeks from this court, plaintiff cannot obtain a medical marijuana business license. And without that license, plaintiff is unable, on its own, to grow, process, dispense, transport, or test medical marijuana in Oklahoma.” (Id.)

Because the court dismissed the suit on clean hands grounds, it had no need to address the merits of OI’s constitutional claim. In fact, in its entire opinion, the court devoted only a few words to that claim, describing it as “not frivolous.” (Id. at p. 5)

I think the court may have erred, for two main reasons:

1. Ordering Oklahoma to obey the constitution would not “facilitate” illegal conduct in the relevant sense

The court’s clean hands ruling rests on the notion that ordering Oklahoma to give OI a license to sell marijuana would facilitate OI’s illegal conduct. But I think this reasoning mischaracterizes what licensing actually does. When Oklahoma licenses a company like OI to grow or sell marijuana, it merely allows the company to engage in those activities free of state interference. In other words, the license indicates that the state will not punish the licensee for growing or selling marijuana. I don’t think this constitutes “facilitating illegal acts” for purposes of the clean hands doctrine. I think the doctrine is only implicated when a plaintiff asks for the court’s active assistance or participation in its illegal acts, which might happen, for example, if OI demanded that Oklahoma enforce its contracts with vendors. (I discuss the issues surrounding contract enforcement in the book on pages 646-652.)

Indeed, the clean hands cases cited by the court in Original Investments all involved plaintiffs that sought such active government assistance in their (federally) illegal marijuana businesses. In Fourth Corner, for example, a marijuana credit union wanted the Federal Reserve to provide it banking services, including electronic payment services. And in In re Arenas, a marijuana cultivator wanted a bankruptcy trustee to take control of its operations and liquidate its inventory of marijuana plants. (The court discusses these cases on page 4.) I think the relief sought by the plaintiffs in those cases was qualitatively different than the relief sought by OI. OI merely wanted the state to get out of its way – to let it compete on the market; it wasn’t asking the state for help or a subsidy.

Separately, I am skeptical that ordering the state to give OI a license would increase the amount of illegal activity taking place in Oklahoma. The court assumes that ordering Oklahoma to issue a license to OI would increase the volume of marijuana sold in the Sooner state. But that won’t necessarily happen. Oklahoma has already issued a staggering number of commercial licenses (more than 2,000). I think it reasonable to suppose that if OI gets a license, it might simply drive one of those existing licensees out of business; or it might go out of business itself. In either case, ordering Oklahoma to give OI a shot would not necessarily facilitate illegal activity; at most, it might just shift who is committing those crimes.

2. The court failed to properly weigh the equities in the case

The clean hands doctrine doesn’t bar courts from hearing all claims brought by wrongdoers. In fact, courts commonly entertain lawsuits brought by wrongdoers when their defendants also have dirty hands. For example, if A steals a diamond from B, and C then steals that diamond from B, B can sue C to recover the diamond, even though B himself is a thief.

In cases where both parties have engaged in wrongdoing, the court is supposed to weigh the equities before dismissing the plaintiff’s claims. Otherwise, dismissal might prove unfair. The Original Investments court seems to recognize this when it acknowledges that the clean hands doctrine is not “rigid.” (Id. at 3.) However, the court concluded that “plaintiff has not identified ‘wrongdoing’ by Oklahoma that tips the scale against application of the illegality defense. Moreover, in the court’s view, plaintiff has not identified a public interest that would be frustrated by application of the illegality defense.” (Id. at 3, n. 5) On this score, the court suggested that Oklahoma was not actually “profiting” from its protectionist licensing policy and $800 million state-licensed marijuana market. It even suggested that “Oklahoma would benefit more by way of receipt of tax revenues if plaintiff and other nonresidents were able to obtain a medical marijuana business license.” (Id. at 3.)

The court’s weighing of the equities strikes me as odd, for two reasons. First, it is implausible to suggest that a state does not “profit” from protectionism. Even if the court is correct that the state is forsaking tax revenues by refusing to license outsiders, the state still might benefit from protectionism in other ways – e.g., such protectionism reserves all of the profits from marijuana businesses for local investors, and it ensures that local residents get all of the jobs created by the marijuana industry.

Second, and even more troubling, the court’s reasoning suggests that states can violate any constitutional provision with impunity so long as they do not glean more tax revenues (i.e., “profit”) from such violations. Consider this stark hypothetical to illustrate the problems with the court’s focus on profits. Suppose Oklahoma announced that it would only award cannabis licenses to White residents. That would be a blatant violation of the Equal Protection Clause. But since Oklahoma would not financially profit from the violation–in fact, “Oklahoma would benefit more by way of receipt of tax revenues if [Blacks and other racial minorities] were able to obtain a medical marijuana business license”—no aggrieved Black license applicant could sue the state.

Just to be clear, I’m not suggesting that a violation of the DCC is as grave as race discrimination, or that Oklahoma’s violation of the DCC is as clear as the blatant Equal Protection violation I’ve just hypothesized. I’m simply trying to illustrate that the court seemed to miss something when it applied the clean hands doctrine. It failed to weigh the constitutional wrong Oklahoma has allegedly committed against OI’s prospective misdeeds (its future violations of the federal marijuana ban).

3. Could OI refile its claim in state court?

One last observation: It is not clear to me that the court’s June 4 ruling will end the lawsuit. Obviously, OI could appeal the decision to the Tenth Circuit. But more interestingly, I wonder if OI could instead refile its lawsuit in state court. Had the federal court ruled on the merits of OI’s DCC claim – i.e., if it had found that Oklahoma did not violate the DCC – OI would be barred by res judicata from refiling its suit elsewhere. But I’m not certain that a decision based on the equitable doctrine of clean hands has the same preclusive effect – i.e., I’m not sure the court’s ruling should be considered a decision “on the merits.” Instead, it might be more akin to an abstention ruling.

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