U.S. Court of Appeals for the First Circuit Issues Potentially Landmark Decision for Cannabis Industry

A federal appellate court has recently ruled that the State of Maine’s law prohibiting non-residents from owning medical marijuana businesses in Maine violates the U.S. Constitution.

On August 17, 2022, in Northeast Patients Group, et al v. United Cannabis Patients and Caregivers of Maine, the U.S. First Circuit Court of Appeals affirmed the District of Maine’s holding that the Maine Medical Marijuana Act’s residency requirement violates the dormant commerce clause of the U.S. Constitution, a legal doctrine that courts have inferred from the Commerce Clause in Article I of the U.S. Constitution, which prohibits states from passing laws that discriminate against or excessively burden interstate commerce. By ruling that the Constitution’s dormant commerce clause applies to the medical cannabis industry, the district court, in a 2-1 decision, upheld a Maine federal judge’s August 2021 ruling striking down Maine’s residency requirement for cannabis business owners, saying it was a clear violation of the constitutional doctrine that limits states’ power over interstate commerce.

While the Court’s ruling in the Northeast case was limited to the medical marijuana context, the decision has potentially far-reaching consequences, which are noted below.

The Details of the Case.

The subject case challenged the Maine Medical Marijuana Act’s residency requirement, which provided that, in order for a marijuana dispensary to be authorized to sell medical marijuana in Maine, all of the officers and directors of the dispensary had to be residents of Maine. Maine had previously eliminated its residency requirement for the adult use market following a prior legal challenge that was also based on the dormant commerce clause, but it had kept in place its policy for its medical cannabis program.

Plaintiff Northeast Patients Group (“NPG”), an operator of three of Maine’s seven licensed marijuana dispensaries, was wholly owned by three Maine residents. The other plaintiff, High Street Capital, was a Delaware corporation owned exclusively by non-Maine residents.  High Street Capital desired to acquire NPG, but under Maine laws, the change in control transaction would have disqualified the resulting company from being an authorized dispensary due to a failure to meet Maine’s domestic licensing requirements. On December 17, 2020, NPG and High Street Capital sued the Maine Department of Administrative and Financial Services challenging the Maine Medical Marijuana Act. NPG and High Street Capital argued that Maine’s residency requirement violates the dormant commerce clause because it expressly favors Maine residents over out-of-state residents by allowing locals to invest in Maine’s marijuana industry to the exclusion of out-of-state businesses.  United Cannabis Patients and Caregivers of Maine, a non-profit advocacy group that represents medical marijuana businesses owned by Maine residents, successfully intervened as a defendant in the case. On August 11, 2021, the District Court held that the Maine Department of Administrative and Financial Services was immune from suit under the Eleventh Amendment of the U.S. Constitution, but also ruled that the residency requirement of the Maine Medical Marijuana Act violates the dormant commerce clause. In so ruling, the district court granted the plaintiffs a permanent injunction against the residency requirement. United Cannabis appealed the district court’s decision leading to the recent ruling. The First Circuit struck down the subject Maine law, concluding that Maine’s residency requirement is a facially protectionist state regulation of an interstate market.

The Northeast court noted that, although the medical marijuana market conflicts with the federal Controlled Substances Act, it is an interstate market, and, as such, the First Circuit was not willing to rule that it is impossible to be an interstate market for a good that is contraband under federal law. Therefore, the First Circuit affirmed the permanent injunction against the Maine Medical Marijuana Act’s residency requirement for violating the dormant commerce clause.

Background - Federal Laws.

The cannabis industry has evolved and currently exists in a somewhat odd legal environment, in that cannabis remains illegal at the federal level under the Controlled Substances Act. While cannabis is federally illegal under the Controlled Substances Act, the Rohrabacher–Farr amendment bars the Justice Department from using its funds to interfere in state-legal medical cannabis markets. The Rohrabacher–Farr amendment is legislation first introduced in 2001, prohibiting the Justice Department from spending funds to interfere with the implementation of state medical cannabis laws. It passed the House in May 2014 after six previously failed attempts, becoming law in December 2014 as part of an omnibus spending bill. The passage of the amendment was the first time either chamber of Congress had voted to protect medical cannabis patients, and is viewed as a historic victory for cannabis reform advocates at the federal level. The amendment does not change the legal status of cannabis, however, and must be renewed each fiscal year in order to remain in effect.

As cannabis use has become more acceptable in our society, states have increasingly passed regulations allowing the legal growing, sale and usage of cannabis under state laws, for medical and recreational uses, and, in response, federal enforcement has been largely ignored when such cannabis activity is otherwise in strict compliance with applicable state laws.

As noted above, the commerce clause is meant to prevent states from enforcing laws that unduly restrict interstate commerce unless given specific instruction from Congress.

The Rohrabacher–Farr amendment and the expansion of the commerce clause to cannabis commercialization offer even potentially greater protections to the cannabis industry.

Consequences of the First Circuit’s Decision.

As a result of this recent ruling, pending any potential appeal, out-of-state residents will be permitted to own and operate medical marijuana dispensaries in Maine.

The Northeast court did not explicitly speak to how state bans on cannabis imports and exports relates to the dormant commerce clause; however, even if the First Circuit’s ruling does have implications to that end, the court’s citing of the Rohrabacher–Farr amendment signals that any further applications would be limited by the First Circuit to medical cannabis commerce unless and until Congress enacts a similar rider covering broader adult-use programs.

For now, it is important to note that this appellate court ruling is limited to and only affects states within the First Circuit – namely, Maine, Massachusetts, New Hampshire, Puerto Rico and Rhode Island. Other circuits could reach differing conclusions from the First Circuit’s holding, and any potential conflict could ultimately be brought before and definitively decided by the U.S. Supreme Court.

Further Possible Ramifications of the First Circuit’s Decision.

While recognizing the limited scope of the Northeast holding, the First Circuit’s decision could allow for broader interstate cannabis commerce, as the same reasons for overturning the residency restrictions could apply to state-level prohibitions on the export and import of marijuana. In other words, disallowing exports and imports of medical cannabis between consenting states could be construed as similarly protectionist and unconstitutional.

Many states prioritize licensing applicants if they reside in an area within the state that has witnessed comparatively higher levels of enforcement of laws criminalizing marijuana usage. An interesting extrapolation of the Northeast case could allow for a possible further consequence: if a state’s residency requirement violates the dormant commerce clause as an unconstitutionally protectionist policy, as is now the ruling in Maine, an analogous argument could be posited about state laws that favor license grants for those who reside in a certain area within the state. In other words, why allow for any inter-state or intra-state residency discrimination?

In short, the recent ruling in the Northeast case could move the needle further in the direction of more widespread legalization of the cannabis industry, including interstate applications. In the ever-evolving cannabis landscape, Congress may face increased pressure to pass federal cannabis reform, to eliminate conflicts between federal and state laws.

We will continue to monitor and report on important trends in the cannabis industry. 

For more information on Shipman’s cannabis practice, click here.