On the Constitutionality of New York’s Marihuana Regulation and Taxation Act
7.9.2024
Introduction
As the United States undergoes a transformation in cannabis legalization, states are confronted with the conflict between state regulatory structures and federal constitutional principles. New York, in its commitment to extensive cannabis reform, has implemented legislation to oversee the cultivation, distribution and consumption of cannabis within its jurisdiction. Nonetheless, the constitutional ramifications of these state regulations, notably in the context of the dormant commerce clause and state residency requirements, have ignited substantial legal debate.
This article considers the constitutionality of New York’s Marihuana Regulation and Taxation Act, which prohibits vertical integration of out-of-state production with in-state dispensaries, called the “true party in interest” framework. The examination centers on the dormant commerce clause, aiming to assess whether the state’s regulatory structure violates constitutional principles by favoring in-state interests at the expense of out-of-state competitors.
First, the background provides the current legal landscape, detailing New York’s cannabis law and the dormant commerce clause. Next, the discussion section analyzes the constitutional likelihood of the true party of interest framework, exploring whether constitutional considerations extend to a federally illegal substance and determining the likely outcome of the framework within this context. This section reflects on the social equity objectives embedded in New York’s cannabis law, ultimately positing that New York presents a compelling case for the constitutionality of the true party of interest framework. I conclude by contemplating the future landscape of federal legalization and how a potential congressional act could safeguard state laws aimed at supporting minority- and family-owned cannabis enterprises, thereby advancing social equity goals.
Background: The Current Legal Landscape
New York State is constructing a new cannabis industry that “protects public health and safety by providing access to safe, tested, regulated products and creates opportunity particularly for the communities most impacted by historic overcriminalization.”[1] In 2021, the Marihuana and Taxation Act introduced the Cannabis Law,[2] transferring the oversight of cannabis regulation from law enforcement to the newly established Cannabis Control Board and the Office of Cannabis Management. There is growing debate over whether the legislation is an unconstitutional state regulation of interstate commerce under the dormant commerce clause.[3] Specifically, MRTA Section 123.9(j) is, essentially, a prohibition on vertical integration of cannabis production and sale:
[N]o retail dispensary or its true party of interest is permitted to hold a direct or indirect interest in, or be a true party of interest, passive investor, landlord, financier, or management services provider, or by any other means, to a cultivator, processor, distributor, cooperative, microbusiness, ROD, ROND, registered organization, or cannabis laboratory licensee or permittee or any person licensed outside of New York State who are licensed to function as any of the aforementioned licensees. MRTA § 123.9(j).[4]
This statute potentially presents a conflict between state and federal authority because it prohibits any party wishing to participate in the New York retail market from having interests in other segments of the supply chain like cultivation, processing and distribution outside New York State. This framework, the “true party of interest,” is designed to protect the integrity of the two-tier cannabis market architecture and establish procedures for monitoring and enforcing vertical and horizontal ownership restrictions.[5]
The commerce clause, found in Article I, Section 8 of the U.S. Constitution, grants Congress the power to regulate interstate commerce.[6] Derived from this explicit grant of power, the dormant commerce clause is a legal doctrine that encompasses a negative command that limits “the power of local governments to enact laws affecting interstate commerce.”[7] This negative implication “prohibits state taxation or regulation that discriminates against or unduly burdens interstate commerce and thereby impedes free private trade in the national marketplace.”[8] Additionally, the clause “precludes the application of a state statute to commerce that takes place wholly outside of the State’s borders, whether or not the commerce has effects within the State.”[9]
The foundation of the commerce clause rests on the principle that states should refrain from erecting barriers or promoting their own interests to the detriment of interstate commerce. According to Supreme Court precedent, a statute can withstand a commerce clause challenge if it regulates evenhandedly to effectuate a legitimate local public interest” and “its effects on interstate commerce are only incidental,”[10] or that “it is narrowly tailored to advance a legitimate local purpose.”[11] Explicitly advantaging residents over nonresidents in cannabis licensing schemes is a direct violation.[12]
Courts apply one of two frameworks when assessing dormant commerce clause claims, asking first whether the challenged law is discriminatory on its face against interstate commerce. The second step evaluates the presence of a valid local purpose based on the level of review.[13] First, if the challenged law represents “economic protectionism,” as determined by either clearly “discriminatory purpose” or “discriminatory effect,” in favor of intrastate commerce, then the court applies a strict scrutiny review.[14] Unless the state successfully demonstrates that the regulation is “narrowly tailored to advance a legitimate local purpose” and that there exists no reasonable, nondiscriminatory regulatory alternative to achieve the proposed policy rationale,[15] laws falling under this category are invalidated. Given the stringent nature, state mandates seldom withstand challenges under this standard because they are required to affirmatively prove that there are no possible nondiscriminatory regulatory alternatives.[16]
Second, a law that does not “clearly discriminate” but still “imposes a burden on interstate commerce” or “has the practical effect of extraterritorial control of commerce occurring entirely outside the boundaries of the state in question” is subject to the more permissive Pike balancing test,[17] which considers the burden imposed on interstate commerce compared to putative local gains.[18] The Pike balancing test permits law that burdens interstate commerce so long as the burden it imposes is not excessive in relation to its value in protecting health, safety, the environment or consumers.[19] The plaintiff bears the initial burden of showing discrimination, and the state government bears the burden of identifying legitimate local purposes.[20]
Accordingly, a state statute violates the dormant commerce clause if it:
- Clearly discriminates against interstate commerce in favor of intrastate commerce and is not so narrowly tailored to advance a legitimate local purpose that there exists no reasonable, nondiscriminatory alternative.
- Imposes a burden on interstate commerce incommensurate with the local benefits secured.
- Has the practical effect of extraterritorial control of commerce occurring entirely outside the boundaries of the state in question.[21]
The following subsections take a closer look at each requirement.
The objective of prohibition against discrimination is “to prohibit state or municipal laws whose object is local economic protectionism, laws that would excite those jealousies and retaliatory measures the Constitution was designed to prevent.”[22] The fundamental objective of the clause is to “preserve a national market for competition undisturbed by preferential advantages conferred by a State upon its residents or resident competitors.”[23] The term “discrimination” in this context “simply means differential treatment of in-state and out-of-state economic interests which benefit the former and burden the latter.”[24] Discrimination “assumes a comparison of substantially similar entities.”[25] A challenged law can survive this heightened level of scrutiny “only on a showing that it is narrowly tailored to advance a legitimate local purpose.”[26] If the heightened standard applies to a challenged law, the law is “virtually invalid per se.”[27] The burden of demonstrating that the challenged law survives the heightened scrutiny rests on the defendants.[28]
In order to assert a claim based on discrimination, a plaintiff must pinpoint an in-state commercial interest that is, either directly or indirectly, given preference by the contested statutes to the detriment of out-of-state competitors.[29] Thus, if there is no existing or potential competition between the entities that are purportedly favored and disfavored within a single market, there can be no local preference.[30] Following, the clause does not apply to laws that do not create competition between in-state and out-of-state industry actors.
Undue Burden on Interstate Commerce
Should the court determine that the statute does not clearly discriminate against interstate commerce, the inquiry turns to evaluation of the validity of the law under the Pike balancing test.[31] The Pike test is often directed at differentiating “protectionist measures” from those that can fairly be viewed as directed to legitimate local concerns with incidental effects on interstate commerce.[32] A Pike claim is denied when the plaintiff is unable to “identify any in-state commercial interest that is favored, directly or indirectly.”[33]
Under this more lenient test, the challenged regulation will be upheld when a state “regulates even-handedly to effectuate a legitimate local public interest” and the effects on interstate commerce are purely incidental. Unless they “place a burden on interstate commerce that is clearly excessive in relation to the putative local benefits,”[34] state laws frequently survive this scrutiny.[35]
Impermissible Regulation of Out-Of-State Commerce
Additionally, a statute violates the clause if it “directly controls commerce occurring wholly outside the boundaries of a State.”[36] The Second Circuit has stated that, “[w]hen assessing a plaintiff’s extraterritoriality theory, we focus squarely on whether the state law has ‘the practical effect of requiring out-of-state commerce to be conducted at the regulating state’s direction.’”[37] In this analysis, courts not only assess the impact of the contested law but also the effects that would emerge if not just one, but many or every state were to enact similar legislation.[38] Courts have consistently acknowledged, however, that the mere occurrence of repercussions beyond state lines holds no judicial significance, as long as the action does not encroach upon the constitutional limits.[39]
Can Federal Law Regulate a Federally Illegal Substance?
We don’t know, but probably.
Due to its federal illegality, the cannabis industry stands out as one of the few sectors where states have been able to implement regionally preferential laws, reserving business licenses exclusively for in-state residents. These regionally preferential laws persist despite such preference for in-state applicants being a clear violation of the dormant commerce clause in other contexts.[40] While states have a degree of discretion in issuing cannabis licenses, the inclusion of “resident only” clauses remain a fundamental component in the eligibility criteria for licenses in most states with legalized cannabis.[41]
This section considers the high likelihood of the dormant commerce clause applying to the MRTA, given the national trend in federal circuit courts and the recent district court holding in Variscite NY One v. New York.
Does Constitutional Law Apply to Marijuana?
The issue of whether the dormant commerce clause applies to a marketplace of federally illegal goods is up for debate: this disagreement raises further constitutional questions, such as states banning cannabis importations from other states, particularly when the free movement of goods and services is one of its tenets.[42] In 2023, a district court judge in Tacoma, Washington, ruled that Washington state’s residency requirement was constitutional, stating the clause “does not apply to federally illegal markets, including Washington’s cannabis market, and thus, it does not apply to Washington’s residency requirements.”[43]
On the other side of the nation in 2022, the First U.S. Circuit Court of Appeals ruled the opposite when it dismissed Maine’s claim that the clause did not apply to a marketplace of federally illegal goods.[44] Maine contended that, due to the federal illegality of cannabis businesses, the Controlled Substances Act had eliminated the interstate market for cannabis. The court disagreed and concluded that Maine’s Medical Marihuana Act violated the clause by prohibiting nonresidents from owning or operating a state-licensed medical marijuana dispensary. The court was not “persuaded that the Dormant Commerce Clause [could] have no effect in a market in which Congress has made participation criminal.”[45] Furthermore, the court cited a law explicitly permitting out-of-state qualified patients to buy and possess limited quantities of cannabis in Maine, concluding that this explicitly acknowledged the existence of an interstate market.[46]
New York Likely To Apply Constitutional Law: Variscite NY One v. New York
Despite the diverging views, given the U.S. District Court for the Northern District of New York’s grant of the preliminary injunction in Variscite,[47] it is likely that New York courts will follow the First Circuit’s approach in holding that the clause applies to the state’s cannabis law. In the decision, favoring an out-of-state applicant ineligible for a New York license due to the lack of ties to the Empire State, the court aligned with numerous federal courts deeming state cannabis licensing systems that prioritize in-state applicants over out-of-state ones as unconstitutional.[48]
Under MRTA Section 3, a person or entity may be an “applicant” for a cannabis license only if that applicant has “a significant presence in New York state, either individually or by having a principal corporate location in the state; is incorporated or otherwise organized under the laws of [New York] state; or a majority of the ownership are residents of [New York] state.” Several other provisions within the law outline the criteria to fulfill this residency requirement.
Variscite’s request for a conditional adult-use retail dispensary license was rejected because it is majority-owned by an individual lacking substantial ties to New York, failing to satisfy the “significant presence” criterion outlined in the law. Variscite sought an injunction barring New York’s Office of Cannabis Management from issuing any licenses, alleging that this licensing regime violated the commerce clause by discriminating against out-of-state commerce. The court cited many other district courts in support of applying strict scrutiny review.[49]
However, in their briefing, the state did not address whether the challenged law and regulations could survive heightened scrutiny, only asserting that the “market participant” exception applied. The court rejected this because it was “readily apparent that the State [was] acting as a governmental entity rather than a private business.” The court held that Variscite was likely to succeed on their ultimate claims, thus granting the preliminary injunction. The injunction remained in place until June 2023, when the matter was resolved by a settlement that resulted in a license being granted to the plaintiff.[50]
Hence, it is highly probable that a district court will determine that New York’s cannabis law is subject to the dormant commerce clause. However, there is no legal precedent addressing the more precisely crafted regulation of the true party of interest framework, which does not outright bar nonresidents of New York. Nor does any precedent consider the compelling interests of the state in enacting such a law.
The Dormant Commerce Clause Standard of Review
The true party of interest framework imposes a narrower, and more narrowly tailored, constraint on interstate trade compared to the full prohibition on out-of-state applicants in Variscite. There is no directly equivalent precedent to indicate how a court might interpret this type of restriction.
The following section analyzes an analogous constitutional challenge in New York, in the hopes of drawing comparison to the marijuana statute and predicting how the court might rule.
Case Study: National Shooting Sports
In National Shooting Sports,[51] a gun trade association brought suit against Attorney General Letitia James, alleging that N.Y. Gen. Bus. Law Sections 898-a–e was unconstitutional because (among others) it violated the dormant commerce clause. Specifically, the law states:
- No gun industry member, by conduct either unlawful in itself or unreasonable under all the circumstances shall knowingly or recklessly create, maintain or contribute to a condition in New York state that endangers the safety or health of the public through the sale, manufacturing, importing or marketing of a qualified product.
- All gun industry members who manufacture, market, import or offer for wholesale or retail sale any qualified product in New York state shall establish and utilize reasonable controls and procedures to prevent its qualified products from being possessed, used, marketed or sold unlawfully in New York state.
Following the three-step analysis defined above, the court found that Section 898 did not violate the dormant commerce clause. The case is currently on appeal in the Second Circuit.[52]
Clear Discrimination Against Out-of-State Commerce
Plaintiffs argued that Section 898 was facially discriminatory because it only applies to interstate commerce and is not applicable to wholly intrastate gun industry members, based on the definition of “qualified products.” A qualified product is “a firearm . . . or ammunition . . . or a component part of a firearm or ammunition, that has been shipped or transported in interstate or foreign commerce.”[53]
The court held that there was no discrimination against out-of-state commerce in favor of in-state commerce because all New York State gun industry members were equally subject to Section 898. Even if a member of the gun industry in New York State were to produce and sell a firearm within the state, the firearm would still be subject to Section 898 if any component part of that firearm originated from outside the state. Because there are no in-state competitors exempt from Section 898, there is, therefore, no possibility that the law clearly discriminated against out-of-state competitors in favor of in-state competitors. Because all industry members were subject to the same law, the state of New York could not discriminate against out-of-state commerce in favor of in-state commerce.[54]
The True Party of Interest Framework Likely Does Not Clearly Discriminate Against Out-of-State Commerce
The question of whether the true party of interest framework clearly discriminates against out-of-state commerce will likely turn on whether the law applies equally to in-state and out-of-state retail dispensaries, and if a prospective plaintiff is able to clearly allege that an in-state competitor not subject to the framework exists.
Similarly to National Shooting Sports, the framework does not explicitly bar out-of-state competitors; it merely regulates their conduct in compliance with New York law. Unlike National Shooting Sports, the framework goes further than subjecting products that have been shipped or transported in interstate or foreign commerce to New York law by prohibiting those with out-of-state interests from holding a dispensary interest in New York. The wording of the statute complicates the analysis because it does not explicitly burden any out-of-state operators, instead merely limiting the interests of in-state dispensary owners.
There may be merit to the argument that the inverse of the statute delineates in-state from out-of-state competitors, i.e., no person licensed outside of New York State is permitted to hold a direct or indirect interest in a retail dispensary in New York State. If the court determines that the language of MRTA Section 123.9(j) is appropriately interpreted in the inverse, it may deduce that the law is facially discriminatory by barring out-of-state competitors with certain interests from participating in the New York market.
However, a plaintiff faces a challenging hurdle to show that no in-state competitor exists who is exempt from true party of interest when the law clearly and precisely applies to a “retail dispensary or its true party of interest” in New York State. Through the plain language of the law, it would be all but impossible to argue that the law clearly discriminates against out-of-state competitors in favor of in-state competitors when the regulation imposes a burden solely on in-state operators. Therefore, it is unlikely, following the analysis of National Shooting Sports, that the true party of interest will be found facially discriminatory and analyzed under strict scrutiny analysis of the dormant commerce clause.
Undue Burden on Interstate Commerce
In National Shooting Sports, the court found that, “[t]o be prohibited, a statute still must favor an in-state commercial interest over a corresponding out-of-state commercial interest.” Because the court found Section 898 evenly applies to both in-state and out-of-state competitors, the court concluded that there could be no in-state commercial interests that benefit from Section 898.[55]
The True Party of Interest Framework Unlikely To Place Undue Burden on Interstate Commerce
Similarly, the plaintiff must successfully allege that the true party of interest framework distinguishes from in-state and out-of-state operators to demonstrate that it places an undue burden on interstate commerce. Should the court apply the textual interpretation of MRTA Section 123.9(j), it will likely also conclude that there is no burden on interstate commerce.
Impermissible Regulation of Out-of-State Commerce
In National Shooting Sports, the plaintiffs alleged that Section 898 impermissibly regulated out-of-state commerce by declaring conduct to be unlawful in New York when the same conduct was fully lawful where it occurred. The court found that issues regarding “compliance with regulations regarding the safe manufacturing, marketing, or selling of a product” to be outside the extraterritoriality-dormant commerce clause doctrine.
The Supreme Court has struck laws as impermissibly extraterritorial when they “went a step further, controlling in-state and out-of-state pricing of goods going into the state.”[56] These cases, however, only concerned price control that involved tying the price of in-state products to out-of-state products.[57] Indeed, in Vizio, Inc. v. Klee, the Second Circuit upheld a law facing a challenge where “the state law did not make specific reference to the terms of pricing and [did] not attach in-state consequences where the pricing terms violate the statute.”[58] Additionally, in Grand River Enterprises Six Nations, the Second Circuit determined that if the impact of a local statute is both indirect and incidental to the statute’s purpose, it differs from economic regulations that are considered to be in violation of the clause.[59]
The True Party of Interest Framework May Impermissibly Regulate Out-of-State Commerce
Unlike Section 898, the true party of interest is not itself concerned with safety of cannabis, but New York may be able to provide evidence relating the two. The court in National Shooting Sports does not rely solely on the safety aspects of Section 898, instead arguing that the dormant commerce clause should not be read so narrowly to consider every state consumer protection as “protectionist.”[60] However, “regulations that touch upon safety. . . are those that the Court has been most reluctant to invalidate.”[61] The true party of interest framework is designed to “reduce the illegal drug market and reduce violent crime, [and to] reduce participation of otherwise law-abiding citizens in the illicit market.”[62] Therefore, the state might be able to rely on this precedent if they can provide a nexus between the true party of interest and its effect on consumer safety.
However, there is a strong argument for a potential plaintiff that the true party of interest impermissibly regulates out-of-state commerce by designating the types of out-of-state financial interests an in-state operator can or cannot have. This is likely its weakest point of constitutionality. Here, the practical effect of the true party of interest framework is that no party in interest to an out-of-state cultivator, processor or distributor (among others) is permitted to own a retail dispensary in New York. The court is likely to consider the impact the true party of interest would have if many other states were to enact similar legislation.[63] This situation would create an incredibly complicated and burdensome legal framework for cannabis multistate operators. Essentially, vertical integration in the cannabis market between states would be illegal. There are strong equity arguments against such a law, including the loss of efficiencies of scale and the loss of efficiencies associated with integrated manufacture and sale. Because producers would not be able to retail their own goods outside of a single state, there is also an argument of consumer harm by limiting product selection. This supports an argument that widespread application of the true party of interest would substantially burden competition. Application of the framework may, therefore, essentially limit cannabis retail to state-only operators or ban vertical integration.
Courts have consistently acknowledged, however, that the mere occurrence of repercussions beyond state lines holds no judicial significance, as long as the action does not encroach upon the constitutional limits.[64] The inquiry thus turns to whether New York has a compelling and sufficient State interest that would justify the regulation of out of state commerce.
Social Equity: New York State’s More Tailored Argument
If the true party of interest framework is deemed to be facially discriminatory, New York State will be required to show that the law is precisely tailored to achieve its purpose under strict scrutiny. Should it constitute an impermissible regulation of out-of-state commerce, New York State will need to demonstrate that the law does not impose an excessively burdensome impact on interstate commerce compared to the potential local benefits under the Pike balancing test. Given the above analysis, it is likely that the court will apply this more lenient balancing test. The crucial consideration for the court, then, will be whether there is a sufficient nexus between the prohibition on out-of-state interests and the stated goals of New York Cannabis Law.[65] Ultimately, the true party of interest framework is likely to pass either level of review, given the compelling interests of New York’s Cannabis Law, the intent of which is to:
regulate, control, and tax marihuana, heretofore known as cannabis, generate significant new revenue, make substantial investments in communities and people most impacted by cannabis criminalization to address the collateral consequences of such criminalization, prevent access to cannabis by those under the age of twenty-one years, reduce the illegal drug market and reduce violent crime, reduce participation of otherwise law-abiding citizens in the illicit market, end the racially disparate impact of existing cannabis laws, create new industries, protect the environment, improve the state’s resiliency to climate change, protect the public health, safety and welfare of the people of the state, increase employment and strengthen New York’s agriculture sector.[66]
New York’s social equity program has been strategically crafted to extend opportunities within the cannabis industry to those most affected by the historical overcriminalization of the state’s former cannabis prohibition. The nuanced argument New York can present lies in the assertion that this local objective can only be authentically realized through the deliberate limitation of dispensary licenses to exclude multistate operators. In this careful curation of market participation, New York endeavors to safeguard and nurture economic avenues for individuals without the expansive capital resources characteristic of multistate operators.[67] By strategically forestalling their entry into the cannabis marketplace, New York endeavors to uphold and perpetuate this distinctive economic opportunity, fostering a more inclusive and equitable industry landscape.
New York’s potential arguments extend beyond the mere reservation of marijuana dispensary licenses, because the state can assert that this strategic exclusion of entities with out-of-state growing or production interests is narrowly tailored to advance the compelling state interest of fostering and championing local enterprise within these license categories. New York’s cannabis regulation attempts to serve as both an economic catalyst and a robust deterrent against the specter of monopolization by colossal out-of-state operators to bolster small, local businesses.
The Cannabis Law, driven by the legitimate interest of shielding smaller businesses from the throes of intense and often insurmountable competition, contemplates the hypothetical scenario of multistate operators establishing dispensaries within its borders. True party of interest aims to create a fair, competitive market distinct from the oligopolies of most other U.S. markets, in which a handful of producers often control over 80% of the market.[68] Under the framework, small businesses need not contend with the cross-subsidization strategies wielded by their larger counterparts, creating an arena where they can thrive independently and contribute to New York’s unique cannabis market.[69] This calculated limitation enables a more stable and profitable market.
Furthermore, the true party of interest framework extends a generous latitude in the realm of processor partnerships, the “processor in name only” license, which allows multistate operators to procure biomass from established local farmers or pursue acquisition of a dedicated grow license. This deliberate inclusivity underscores the overarching aim: to beckon out-of-state brands into New York’s burgeoning cannabis market.[70] In crafting this regulatory framework, New York strategically champions diversity and inclusion, offering a compelling argument that the true party of interest framework stands as a beacon of encouragement rather than a hindrance to interstate commerce. The state navigates the delicate balance, where it neither impermissibly regulates nor burdens interstate commerce unduly. New York thus emerges as an exemplar, fostering an environment where out-of-state entities are not stifled but welcomed, adding richness and diversity to the ever-evolving narrative of New York’s cannabis landscape.
Hence, New York has a formidable and persuasive contention, asserting that the prerequisites encapsulated within the framework stand as indispensable safeguards, meticulously crafted to fortify the sovereignty and self-determination of the state’s adult-use cannabis dispensaries.[71]
Possible Federal Legalization of Marijuana and Congressional Grant of Authority
This section considers constitutional implications should Congress legalize marijuana.
The dormant commerce clause is a default rule.[72] Congress may override this default position and authorize what would otherwise be an unconstitutional burden upon interstate commerce.[73] Given that Congress has the exclusive power to legislate on interstate commerce, it can specifically authorize certain impediments between states so long as it is “unmistakably clear” in its authorization to suspend the default rules of the commerce clause.[74]
In the event of marijuana legalization, a notable precedent is Arnold’s Wines, Inc. v. Boyle,[75] where the Second Circuit utilized a comparable application of the dormant commerce clause to determine that New York’s three-tiered Alcoholic Beverage Control Law did not unlawfully discriminate against out-of-state producers. This judgment aligns favorably with the potential constitutionality of the true party of interest framework, which draws inspiration from the Alcoholic Beverage Control Law.[76] Because the 21st Amendment explicitly conferred upon states the authority to regulate alcohol within their confines,[77] the Second Circuit asserted that mandating out-of-state liquor to traverse through a licensed in-state wholesaler and retailer was an equitable regulation of liquor importation and distribution within the state. Consequently, the court concluded that the three-tier system does not violate the clause.
This consideration introduces a dual perspective into this analysis. Critics of the true party of interest might posit that, lacking the explicit congressional authorization for cannabis akin to the 21st Amendment’s endorsement of liquor regulation, the true party of interest framework runs afoul of the dormant commerce clause. Conversely, proponents of true party of interest are likely to counter with the assertion that, given cannabis’s federal illegality, rather than constitutional prohibition, explicit congressional authorization is unnecessary. Ultimately, the debate may remain inconclusive until there is further federal action on cannabis legalization.
As Congress deliberates on the prospect of a national cannabis marketplace, a critical focus should be directed toward the delineation of intrastate regulation and interstate commerce. Understanding how the federal government envisions states regulating this burgeoning industry becomes paramount in navigating the intricate landscape of a legalized cannabis market.
In conclusion, analysis of New York’s true party of interest framework within the framework of the dormant commerce clause reveals that the state’s regulatory approach likely withstands constitutional scrutiny. While the dormant commerce clause serves to prevent states from erecting unjustifiable barriers to interstate commerce, the above examination finds that New York’s cannabis regulations do not disproportionately favor in-state interests at the expense of out-of-state competitors.
The absence of discriminatory practices against out-of-state entities and the state’s legitimate pursuit of public equity objectives contribute to the constitutionality of the true party of interest. Courts have consistently acknowledged that states possess the authority to regulate local industries without necessarily violating constitutional principles. New York’s cannabis regulations, when viewed through the lens of the dormant commerce clause, align with the state’s prerogative to regulate and control an evolving industry without unjustifiably impeding interstate commerce.
This conclusion underscores the importance of a nuanced understanding of the nexus between a state’s interests and its regulatory reach. As states continue to navigate the complex terrain of cannabis legalization, New York’s approach likely stands as a model that successfully balances regulatory interests without exceeding the constitutional constraints imposed by the dormant commerce clause.
Taryn Willett is a recent graduate from the University of Texas School of Law. Prior to law school, she received her Bachelor of Science in chemical engineering and minor in computational math from Rice University. She worked as an engineer for Samsung Austin Semiconductor in the ion doping department. She also worked for the United States Patent and Trademark office examining patents related to plastics molding, nanoimprinting and electronic cigarettes. This fall she will join Finnegan, Henderson, Farabow, Garrett & Dunner as an associate in their Palo Alto office. The opinions expressed are her own and not the views of her employer.
This article appears in NY Business Law Journal, the publication of the Business Law Section of NYSBA as a featured article from the Business Law Section’s Law Student Writing Competition. For more information, please visit NYSBA.ORG/BUS.
Endnotes
[1] Cannabis Law Overview, Office of Cannabis Management, New York State, https://cannabis.ny.gov/cannabis-law-overview.
[2] Marihuana Regulation and Taxation Act, N.Y. S854A 2021–22.
[3] Dormant Commerce Power: Overview, Legal Information Institute, Cornell Law School,
https://www.law.cornell.edu/constitution-conan/article-1/section-8/clause-3/dormant-commerce-power-overview.
[4] MRTA, N.Y. S854A § 123.9(j), 2021–22.
[5] True Parties of Interest Hub, Office of Cannabis Management, New York State, https://cannabis.ny.gov/tpi-hub. (“TPI Hub.”)
[6] U.S. Const., Art. I, § 8, cl. 3.
[7] Town of Southold v. Town of E. Hampton, 477 F.3d 38, 47 (2d Cir. 2007) (citing Hughes v. Oklahoma, 441 U.S. 322, 326 (1979)).
[8] Gen. Motors Corp. v. Tracy, 519 U.S. 278, 287 (1997).
[9] Healy v. Beer Inst., Inc., 491 U.S. 324, 336 (1989) (quoting Edgar v. MITE Corp., 457 U.S. 624, 642–43 (1982)).
[10] City of Philadelphia v. New Jersey, 437 U.S. 617 (1978).
[11] Tenn. Wine & Spirits Retailers Ass’n v. Thomas, 139 S. Ct. 2449, 2461 (2019).
[12] Michael Jordan, Agustin Rodriguez, Christina Sava, Cannabis Residency Rules Toppling? First Circuit Is the First Domino to Fall, JD Supra, Aug. 22, 2022, https://journal.cannabislawreport.com/troutman-pepper-cannabis-residency-rules-toppling-first-circuit-is-the-first-domino-to-fall/. (“Jordan 2022”).
[13] South Dakota v. Wayfair, Inc., 585 U.S. 162 (2018).
[14] See Minnesota v. Clover Leaf Creamery Co., 449 U.S. 456, 471 (1981).
[15] Tenn. Wine & Spirits Retailers Ass’n, 139 S. Ct. at 2461; Wyoming v. Oklahoma, 502 U.S. 437, 454 (1992).
[16] See Maine v. Taylor, 477 U.S. 131, 138 (1986) (upholding Maine’s ban on importing baitfish when it served a legitimate public purpose, and that purpose could not have been served by nondiscriminatory means).
[17] Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970).
[18] National Shooting Sports Foundation, Inc. v. James, 604 F. Supp. 3d 48 (2022).
[19] Pike, 397 U.S. at 142 (“Where the statute regulates even-handedly to effectuate a legitimate local public interest, and its effects on interstate commerce are only incidental, it will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits.”).
[20] Family Winemakers of Cal. v. Jenkins, 592 F.3d 1, 9 (1st Cir. 2010).
[21] National Shooting Sports, 604 F. Supp. 3d 48; Grand River Enters. Six Nations v. Boughton, 988 F.3d 114, 123 (2d Cir. 2021).
[22] C & A Carbone, Inc. v. Town of Clarkstown, 511 U.S. 383, 390 (1994).
[23] Brown & Williamson Tobacco Corp. v. Pataki, 320 F.3d 200, 208 (2d Cir. 2003) (quoting Gen. Motors Corp., 519 U.S. at 299).
[24] Oregon Waste Sys., Inc. v. Dep’t of Env’t Quality of State of Or., 511 U.S. 93, 99 (1994).
[25] Gen. Motors Corp., 519 U.S. at 298–99.
[26] Tenn. Wine & Spirits, 139 S. Ct. at 2461 (internal quotation marks and citation omitted).
[27] See Town of Southold, 477 F.3d at 47; see also NPG, LLC v. City of Portland, No. 2:20-CV-00208 at *25 (D. Me. Aug. 14, 2020) (“State laws that discriminate against interstate commerce face a virtually per se rule of invalidity.”); Tenn. Wine & Spirits, 139 S. Ct. at 2471 (and courts “generally str[ike] down the statute without further inquiry.”).
[28] See Lowe v. City of Detroit, 544 F. Supp. 3d 804, 816 (E.D. Mich. 2021).
[29] Selevan v. New York Thruway Auth., 584 F.3d 82, 95 (2d Cir. 2009) (quoting Grand River, 425 F.3d at 169.
[30] Gen. Motors Corp., 519 U.S. at 300.
[31] Town of Southold, 477 F.3d at 50.
[32] Vizio, Inc. v. Klee, 886 F.3d 249, 259 (2d Cir. 2018) (quoting Philadelphia, 437 U.S. at 624).
[33] Freedom Holdings, Inc. v. Spitzer, 357 F.3d 205, 218 (2d Cir. 2004).
[34] Pike, 397 U.S. at 142; USA Recycling, Inc. v. Town of Babylon, 66 F.3d 1272, 1282 (2d Cir. 1995).
[35] Dep’t of Revenue of Ky. v. Davis, 553 U.S. 328, 339 (2008).
[36] Healy, 491 U.S. at 336.
[37] Vizio, 886 F.3d at 255 (quoting SPGGC, LLC v. Blumenthal, 505 F.3d 183, 193 (2d Cir. 2007)).
[38] Id. (quoting Healy, 491 U.S. at 336).
[39] Freedom Holdings, Inc. v. Cuomo, 624 F.3d 38, 67 (2d Cir. 2010) (quoting Osborn v. Ozlin, 310 U.S. 53, 62 (1940)).
[40] Agustin Rodriguez, Christina Sava, and Michael Jordan, Federal Judge Finds NY Cannabis Residency Rules Likely Unconstitutional and Discriminatory Against Out-of-State Applicants, Troutman Pepper, Nov. 15, 2022, https://www.regulatoryoversight.com/2022/11/federal-judge-finds-ny-cannabis-residency-rules-likely-unconstitutional-and-discriminatory-against-out-of-state-applicants/.
[41] Thomas Howard, Dormant Commerce Clause Litigation in Social Equity Cannabis, Collateral Base, https://www.collateralbase.com/dormant-commerce-clause-litigation-in-social-equity-cannabis/.
[42] Rachel K. Gillette, Demystifying the Dorrmant Commerce Clause’s Considerations for Cannabis, Holland & Hart LLP, Reuters Legal News (Aug. 2, 2023). (“Gillette 2023”).
[43] Brinkmeyer v. Wash. State Liquor & Cannabis Bd., C20-5661 BHS (W.D. Wash. Feb. 7, 2023).
[44] Ne. Patients Grp. v. United Cannabis Patients & Caregivers of Maine, 45 F.4th 542 (1st Cir. 2022).
[45] Gillette 2023.
[46] Jordan 2022.
[47] Variscite NY One, Inc. v. New York, No. 1:22-cv-1013 (N.D.N.Y. Jan. 31, 2023).
[48] Philip T. Simpson, Citing Dormant Commerce Clause, Federal Court Enjoins Issuance of Certain New York Cannabis Licenses, Leech Tishman, Nov. 16, 2022, https://www.leechtishman.com/insights/blog/citing-dormant-commerce-clause-federal-court-enjoins-issuance-of-certain-new-york-cannabis-licenses/.
[49] See NPG, LLC, 2020 WL 4741913, at *2; see also Ne. Patients, 45 F.4th 542; Toigo v. Dep’t of Health & Senior Servs., 549 F. Supp. 3d 985, 989 (W.D. Mo. 2021); Lowe, 544 F. Supp. 3d at 807–08; Finch v. Treto, No. 22 C 1508, 2022 WL 2073572, at *12 (N.D. Ill. June 9, 2022).
[50] Alex Malyshev, Looking Ahead to New York Cannabis in 2024: Is ‘Fiore’ Truly in the Rearview Mirror?, New York Law Journal, Dec. 15, 2023, https://www.law.com/newyorklawjournal/2023/12/15/looking-ahead-to-new-york-cannabis-in-2024-is-fiore-truly-in-the-rearview-mirror/.
[51] Id.
[52] Brendan Pierson, Gun Makers Urge US Appeals Court To Shield Them From N.Y. Liability Law, Reuters, Nov. 3, 2023, https://www.reuters.com/legal/government/gun-makers-urge-us-appeals-court-shield-them-ny-liability-law-2023-11-03/.
[53] N.Y. Gen. Bus. Law § 898-a(6) (quoting 15 U.S.C. § 7903(4), emphasis added).
[54] See Town of Southold, 477 F.3d at 49 (finding no discrimination where the law “does not give any advantage to local businesses at the expense of out-of-state competitors”); Angus Partners LLC v. Walder, 52 F. Supp. 3d 546, 562 (S.D.N.Y. 2014) (“Plaintiffs fail to satisfy their burden of identifying an in-state interest that is benefitted or an out-of-state competitor that is harmed”).
[55] National Shooting Sports, 604 F.Supp.3d at 64.
[56] Freedom Holdings, 357 F.3d at 221 (citing Baldwin v. G.A.F. Seelig, Inc., 294 U.S. 511, 519 (1935)); Brown-Forman Distillers Corp. v. New York State Liquor Auth., 476 U.S. 573, 575–76 (1986); Healy, 491 U.S. at 326.
[57] Energy & Env’y Legal Inst. v. Epel, 793 F.3d 1169, 1174 (10th Cir. 2015).
[58] Vizio, 886 F.3d at 255 (quoting Freedom Holdings, 357 F.3d at 221) (internal quotations omitted).
[59] Grand River, 988 F.3d at 1044.
[60] Citing SPGGC, LLC v. Blumenthal, 505 F.3d 183, 194 (2d Cir. 2007).
[61] Kassel v. Consol. Freightways Corp. of Delaware, 450 U.S. 662, 670 (1981).
[62] N.Y. Canbs. § 2.
[63] Id. (quoting Healy, 491 U.S. at 336).
[64] Freedom Holdings 624 F.3d at 67 (quoting Osborn, 310 U.S. at 62).
[65] Jordan 2022.
[66] N.Y. Canbs. § 2.
[67] John Schroyer, interviewing Axel Barnabe, Exclusive Interview: Untangling New York’s True Party of Ownership Rule, Green Market Report, Mar. 23, 2023, https://www.greenmarketreport.com/exclusive-interview-untangling-new-yorks-true-party-of-ownership-rule/. (“Schroyer 2023”).
[68] Schroyer 2023.
[69] Jordan 2022.
[70] Schroyer 2023.
[71] TPI Hub.
[72] Scott Bloomberg and Robert A. Mikos, Legalization Without Disruption: Why Congress Should Let States Restrict Interstate Commerce in Marijuana, Pepp. L. Rev. at 41–49 (2022); Robert A. Mikos, Interstate Commerce in Cannabis, 101 B.U. L. Rev. 857, 862–63 (2021).
[73] S.-Cent. Timber Dev., Inc. v. Wunnicke, 467 U.S. 82, 91-92 (1984). See also Camps Newfound/Owatonna, Inc. v. Town of Harrison, 520 U.S. 564, 572 (1997); Taylor, 477 U.S. at 138; Hillside Dairy Inc. v. Lyons, 539 U.S. 59, 66 (2003).
[74] Id.
[75] 571 F.3d 185 (2d Cir. 2009).
[76] Schroyer 2023.
[77] See, e.g., North Dakota v. United States, 495 U.S. at 432 (1986); Capital Cities Cable, Inc. v. Crisp, 467 U.S. 691, 712–13, (1984); Cal. Liquor Dealers v. Midcal Aluminum, Inc., 445 U.S. 97, 101 (1980).
