To NY's Legal Cannabis Market Stakeholders: An Open Letter

By David Holland

Prince Lobel Tye LLP is a law firm in Massachusetts and New York with significant cannabis clients in both markets as well as other states. On the eve of issuance of Conditional Adult Use Retail Dispensary (“CAURD”) licenses, we urge the Cannabis Control Board (“CCB”) and the Office of Cannabis Management (“OCM”) clarify and/or partially retract its November 8, 2022, revised guidance regarding adult use retail dispensaries in the Empire State (the “Guidance”).

While CCB and OCM have the best of intentions to protect and promote New York’s rollout of its conditional and unconditional adult use retail dispensary licenses, serious concerns arise pertaining to Paragraph 34 of the Guidance. That guidance is contrary to the express provisions of the Marihuana Regulation and Taxation Act (“MRTA”), is unconstitutional, and invites litigation that will delay New York’s market from opening.

What's in the MRTA's Cannabis Licensing Guidance?

The MRTA, which legalized adult use cannabis in New York, is inclusive of individuals and entities that operated successfully elsewhere to ensure that the domestic market would thrive from the collective experience of out-of-state market participants. The MRTA’s Legislative Findings declare:

“The intent of this act is to regulate, control, and tax marihuana, … generate significant new revenue, make substantial investments in communities and people most impacted by cannabis criminalization to address the collateral consequences of such criminalization, … 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.”

The MRTA allows licenses to be held in more than one tier. For instance, licensed cultivators may also obtain a processor license (Art. I §3(19), Art. 4 §68(3)), and licensed processors may obtain distributor licenses (Art. 4 §68(3), Art. 4 §69(1) and (5)), provided that they only process and distribute their own product. Below is a chart of permitted licenses under the MRTA:

(C) David C. Holland and Penelope Crescibene Hamilton

Is New York's Office of Cannabis Management Issuing Unconstitutional Regulatory Guidance?

Paragraph 34 of the November 8th guidance seeks to limit “undue influence” over cannabis retailers by preventing an entity in one license tier from influencing the actions of an entity in another tier. While that is a legitimate goal, the legal problem arises from that portion of the provision that states:

“Retail dispensaries, their true parties of interest, passive investors, and any management service providers cannot have any interest in any business anywhere that cultivates, processes, or distributes cannabis.” [Emphasis Added].

Paragraph 34 goes on to explain that applicants with such an interest across license tiers, “no matter how small that interest is, will not be approved” and if approved, may face revocation of their license if a “prohibited interest” is later discovered. This is not only contrary to the licensing scheme in the chart above, but it is unconstitutional.

The Dormant Commerce Clause in New York's Legal Cannabis Market

The Commerce Clause set forth in Article 1, Section 8, Clause 3 of the United States Constitution gives Congress the power “to regulate commerce with foreign nations, and among the several states, and with the Indian tribes.” The Dormant Commerce Clause refers to the prohibition, implicit in the Commerce Clause, against states laws or regulations that discriminate against or excessively burden interstate commerce.

Paragraph 34 exposes New York’s guidance to federal challenge and reversal under the Dormant Commerce Clause because the express language impermissibly prohibits “any” operator who holds a license “anywhere” in the United States or internationally from entering or obtaining a dispensary license in New York.

Recent federal decisions on these issues in Northeast Patients Group v. United Cannabis Patients and Caregivers of Maine, 45 F.4th 542 (1st Cir., Aug. 17, 2022), and Variscite NY One, Inc. v. State of New York, N.D.N.Y. No. 22-CV-01013, ECF Doc. #23, Nov. 10, 2022, have found that state measures to prevent the entry of out-of-state operators into their domestic cannabis market violates the Dormant Commerce Clause. Good intentions aside, state protectionism at the expense of foreign participation is unconstitutional and subject to judicial intervention and injunction.

Exclusion of out-of-state operators from New York’s emerging market will impede the state’s stated interests in creating jobs, developing the industry, improving communities, and increasing tax revenue. Indeed, the drafters of the MTRA could not have intended such foreign entities to be excluded, because non-New York entities that have a significant presence in New York (but interests outside of it) are included in the law’s definition of “applicant”:

“Applicant” … shall mean a person applying for any cannabis … license or permit issued by the New York state cannabis control board … that: 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 this state; or a majority of the ownership are residents of this state.”

What's Next for CAURD Applicants and New York's Legal Cannabis Industry?

Prince Lobel Tye LLP has established cannabis clients of all sizes that have foreign ownership interests which have submitted CAURD applications or are preparing to seek licensure when the application window opens. Their expertise and business acumen are critical to the amalgam that will contribute to the success of New York’s emerging cannabis industry. Their inclusion in the state’s licensed industry achieves the ambition and reach of the MRTA by ensuring that opportunities are created, communities improved, tax revenue generated, and the significant harms and collateral consequences of the Drug War redressed.

The persistence of Paragraph 34 notwithstanding the express provisions of the MRTA and judicial rulings cited above is folly sure to cause significant delays and financial hardships to New York’s rollout of its legalized cannabis market.

Prince Lobel urges the CCB and the OCM clarify and/or retract the proscriptions contained in Paragraph 34 of the November 8th guidance.

David Holland is a partner with the law firm Prince Lobel Tye. He is Executive and Legal Director of Empire State NORML, the New York State affiliate of the National Organization for the Reform of Marijuana Laws (NORML). He is also a co-founder and President of the New York City Cannabis Industry Association (NYCCIA) and Vice President of the Hudson Valley Cannabis Industry Association (HVCIA). David is also a pro bono Legal Advisor to Last Prisoner Project (LPP) seeking clemency and habeas corpus relief for prisoners of the Drug War.

A version of this article was originally published in NY Cannabis Insider via syracuse.com.