Oh Daddy! It’s not “Rumours” or one of your “Dreams” – although it may be “Second Hand News” to our most knowledgeable readers: A federal court in Washington recently upheld the state’s cannabis residency requirement for operators.
The Federal Government’s Current Position
If you’re reading this, you surely already know: Marijuana is a Schedule I drug under federal law, meaning that Americans (with extremely limited exceptions) may not grow, process, sell, or possess marijuana. At the same time, however, approximately 40 states and territories permit medical marijuana and more than half of those allow adult-use (i.e., “recreational”) marijuana.
We previously wrote about this dichotomy, suggesting its insanity. While the federal government has not legalized cannabis, it has not thwarted the states’ ability to do so. But this post has a narrower focus. There are approximately 40 medical cannabis regimes and approximately 40 different sets of rules. A common rule in cannabis legislation is to require that some portion of the licensee be owned by a resident of the state. There are a number of purported benefits of these so-called residency requirements, but the residency requirements have come under fire lately for allegedly violating the dormant Commerce Clause. Stick with us – it gets interesting.
WTH Is the Dormant Commerce Clause?
Generally speaking, the dormant Commerce Clause prohibits states from treating in-state business interests differently than out-of-state business interests in a discriminatory way. For example, in Tennessee Wine & Spirits Retailers Association v. Thomas, 139 S. Ct. 2449, the U.S. Supreme Court held that Tennessee’s residency requirement for retail liquor store licenses violated the dormant Commerce Clause. In that case, Tennessee required applicants for a retail liquor store license to reside within the state for at least two years prior to submitting the application. The Supreme Court found that “the residency requirement [was] not needed to enable the State [of Tennessee] to maintain oversight over liquor store operators.” Rather, the residency requirement was found to be discriminatory for no other reason but to prevent out-of-state competition. This kind of discrimination is not permitted under the dormant Commerce Clause.
Cannabis law jurisprudence has most often seen this clause applied to challenge residency requirements embedded in state cannabis laws. Let’s say a state with a medical cannabis program prevents a person who has not lawfully resided in the state for at least six months prior from obtaining a business license to produce, process, research, deliver, or sell cannabis. Litigants have argued that residency requirements such as this one treat in-state businesses differently than out-of-state businesses in a discriminatory way that violates the dormant Commerce Clause.
Federal courts in Maine, New York, Missouri, Michigan, and Illinois deciding this issue have agreed that certain residency requirements for a cannabis business license violate the dormant Commerce Clause. Most recently, the U.S. Court of Appeals for the First Circuit held that a Maine residency requirement violated the dormant Commerce Clause.
Just as a trend of finding in favor of out-of-state residents seemed to be developing, another federal court recently went the other direction and reminded those paying attention that the CSA continues to apply in this space.
A Brief Description of the New Washington Decision
Washington legalized adult-use cannabis in 2012. On February 7, 2023, in Brinkmeyer v. Washington State Liquor & Cannabis Bd.,a Washington federal court rejected an Idaho resident’s dormant Commerce Clause argument, finding no violation when his cannabis business license was denied based on Washington’s residency requirement.
Todd Brinkmeyer, an Idaho resident, sought to own a cannabis retail store in Washington. Brinkmeyer previously provided debt financing for his friend’s cannabis retail stores in Washington. His friend desired Brinkmeyer to become a partial owner of and to invest in his cannabis retail stores. In Washington, the Washington State Liquor and Cannabis Board (LCB) issues cannabis business licenses. The LCB confirmed that it would not issue Brinkmeyer a cannabis license because he was not a resident of Washington.
Brinkmeyer filed suit in Washington federal court arguing, among other things, that Washington’s residency requirement was “unconstitutional because [it] discriminates, without justification, against out-of-state citizens,” and therefore, violated the dormant Commerce Clause.
The court held that since Congress holds the power to “deem certain substances federally illegal” and that the there is “no legal interstate market” for cannabis, the dormant Commerce Clause did not apply. Thecourt also noted that “citizens do not have a legal interest in participating in a federally illegal market.” Consequently, the court granted the LCB’s motion for summary judgment and dismissed Brinkmeyer’s suit.
Why Does Any of This Matter?
The central question of the dormant Commerce Clause analysis in these cases – whether a state has the authority to impose residency requirements in its cannabis regime – is hugely consequential for the cannabis industry both within any given state and on a national level. On the one hand, states understandably want control of their cannabis programs, and voters and legislatures typically want to ensure their own people benefit from the program.
On the other hand, allowing non-residents to operate cannabis businesses has its benefits. For example, the amount of capital available is substantially greater if out-of-state operators are allowed to participate, and well-capitalized operators are more likely to have the wherewithal to survive during difficult market conditions and ensure that quality is not sacrificed to save money. In addition, out-of-state operators are almost by definition more experienced in the industry and best able to provide safe and effective product to patients.
State residency requirements aren’t the only ones in the dormant Commerce Clause’s crosshairs. For example, a licensee in Oregon’s cannabis program sued Oregon officials, seeking to use the dormant Commerce Clause to invalidate Oregon’s prohibition on in-state operators from exporting cannabis to other states.
And the case may impact California’s new Senate bill 1326, which creates a process for the interstate shipment of California-produced cannabis to other states, and more recent efforts by California officials to have the state’s attorney general weigh in on that effort.
Brinkmeyer further muddies the already murky water as to how federal courts will employ constitutional doctrines in the cannabis space. From one perspective, the decision certainly provides ammunition for state officials seeking to uphold cannabis residency requirements. From another perspective, it is a single decision from a single federal court in Western Washington – one that represents a minority position when viewed against recent decisions nationwide.
Will the issue continue to divide federal courts, or will there be some judicial resolution? For the latter to occur, it is likely that the Ninth Circuit Court of Appeals (or some other federal appellate court) would have to side with the Brinkmeyer rationale and create a federal circuit court split that could be decided by the United States Supreme Court. We suspect that Court would be reluctant to wade into these waters, but it would certainly bring much-needed clarity.
In the meantime, the inconsistent and fascinating interplay between the federal government’s treatment of cannabis and its state-created legality across the country continues. We’ll continue to monitor the situation as it unfolds, and cannabis operators and investors around the country would be wise to do the same. Put another way, and with our thanks for sticking with all of the Fleetwood Mac references, “Don’t Stop Thinking About Tomorrow.”