Are State Residency Requirements Unconstitutional?

The question posed by the title of this post is inspired by a new lawsuit in Maine. A Delaware corporation (Wellness Connection) has sued Maine’s cannabis licensing board, challenging a provision of that state’s adult use cannabis law that bars out-of-state companies and non-resident investors from obtaining commercial cannabis licenses. The suit was filed on March 20, 2020, in the U.S. District Court for the District of Maine. The full complaint in the lawsuit is here (it’s only 12 pages long).

Even though Maine legalized adult use cannabis back in 2016, the state still has not issued licenses to serve the adult use market (it has an operational medical cannabis industry). This lawsuit could potentially push back the start of Maine’s adult use industry even further.

In this post, I’ll describe the lawsuit, its merits, and two defenses the state might raise to defeat it. My book (Marijuana Law, Policy, and Authority) discusses state discrimination against non-residents on pages 283-288. For a more thorough discussion of the relevant doctrine and background, I highly recommend Brannon Denning’s excellent piece, One Toke Over the (State) Line: Constitutional Limits on ‘Pot Tourism’ Restrictions, 66 Fla. L. Rev. 2279 (2014). It is excerpted in the book.

1. The lawsuit alleges a straightforward violation of the Dormant Commerce Clause.

The specific provision of Maine law that Wellness challenges declares that:

“2. Resident. If the applicant [for a commercial cannabis license] is a natural person, the applicant must be a resident. If the applicant is a business entity:
A. Every officer, director, manager and general partner of the business entity must be a natural person who is a resident; and . . .
B. A majority of the shares, membership interests, partnership interests or other equity ownership interests as applicable to the business entity must be held or owned by natural persons who are residents or business entities whose owners are all natural persons who are residents. . . .
3. Incorporated in State. If the applicant is a business entity, the business entity must be incorporated in the State or otherwise formed or organized under the laws of the State.”

28-B Maine Revised Statutes § 202(2)-(3).

Wellness’s complaint levies a single, straightforward challenge to Section 202. Wellness claims the provision discriminates against non-residents and thus violates a doctrine known as the dormant Commerce Clause (DCC).

The complaint includes a nice, succinct summary of the claim:

“2. Though Maine’s adult use marijuana industry is expected to create significant economic opportunities, a state statute reserves these opportunities in large part for four-year Maine residents, to the exclusion of non-residents. Under 28-B M.R.S. § 202(2) (the “Residency Statute”), non-residents are prohibited both from receiving adult use marijuana licenses and from owning a majority of any Maine company that holds an adult use license.
3. The purpose of the Residency Statute is to discriminate against non-residents. The Department of Administrative and Financial Services has declared on its website that Maine’s marijuana program is designed to “[e]nsure that economic opportunities afforded by marijuana legalization is [sic] available chiefly for the citizens of Maine.”
4. The Residency Statute violates the dormant Commerce Clause of the United States Constitution by explicitly and purposefully favoring Maine residents over non-residents. Before legal sales of adult use marijuana begin in Maine, the Court should enjoin the Defendants from enforcing the Residency Statute. This is the only way to ensure that residents and non-residents alike, including Plaintiffs, are able to participate in Maine’s adult use marijuana industry.
. . .
6. Wellness and Pain Management Connection, LLC (“WPMC”) is a Delaware Corporation. More than 95 percent of WPMC’s membership interests are owned by non-Maine companies which are, in turn, largely or entirely owned by non-Maine residents. . . . Unless enforcement of the Residency Statute is enjoined, WPMC will be unable to receive an adult use license in Maine.”

Complaint pp. 2-3.

In a nutshell, the DCC bars states from erecting barriers designed to protect local economic interests from out-of-state competition. Like preemption, the DCC serves to block the operation of a state law. Unlike preemption, however, the DCC normally applies when Congress hasn’t legislated – i.e., when its power to regulate interstate commerce is dormant. As noted below, courts recognize that Congress can override the basic default rules of the DCC through legislation.

Many state laws could potentially advantage local economic interests, but courts are particularly skeptical of state laws that expressly treat non-residents differently than residents. The test that courts apply to assess the constitutionality of these discriminatory state laws – strict scrutiny -- is very difficult to satisfy. It requires the state to identify a legitimate purpose that cannot be served by any other, non-discriminatory state law.

Back to Wellness’s suit. It seems clear to me that Section 202 discriminates against non-residents. It expressly reserves a valuable commercial opportunity for state residents. This means that strict scrutiny will apply in the case.

What is more, I doubt the state could satisfy the strict scrutiny test. For one thing, protecting local businesses from competition – the purpose Wellness attributes to Section 202 – is NOT a legitimate state interest for purposes of the DCC. In fact, such protectionism is the very “evil” the DCC is designed to address. In any event, even if Maine were able to articulate some other, more legitimate interest – say, preventing Maine-sourced cannabis from being diverted into the black market in other states – it’s difficult to see why limiting ownership of Maine-licensed suppliers is the only way Maine could serve that interest. After all, Maine could try other, less discriminatory measures – like limiting volume sales to consumers or locating shops away from the state’s borders – to combat that problem.

Thus, if this were any other industry, I am confident the court would invalidate Maine’s law under the DCC. But let me suggest two arguments Maine could raise to escape that conclusion and potentially salvage Section 202.

2. Does the DCC even apply to cannabis licensing?

For one thing, Maine could argue that the DCC does not protect Wellness from state discrimination because a congressional statute (the Controlled Substances Act) bans all commerce in marijuana.

A similar argument has foiled state-licensed cannabis businesses from asserting other federally created rights. For example, courts have held that state licensed cannabis suppliers cannot assert the protections afforded by the federal Bankruptcy Code because they are engaged in an unlawful business. Likewise, at least one court has held that state licensed marijuana suppliers have no First Amendment right to advertise their wares so long as federal law bans sales of marijuana (the book discusses the First Amendment issue on pages 501-504).

I am not aware of any case specifically addressing whether the DCC applies to commerce that Congress has banned, but Brannon Denning makes a similar point regarding a related doctrine – the Privileges and Immunities clause. Like the DCC, the Privileges & Immunities Clause bans state discrimination, but only when that discrimination implicates rights that are recognized under federal law. And as Denning points out, selling marijuana isn’t (yet) one of those recognized rights.

I’m not sure where I come out on this particular defense. On the one hand, it would be strange to say that a state violates the DCC when Congress has banned the relevant commerce altogether. On the other hand, it would also be strange to say that a state could arrest non-residents for selling marijuana while it allows its own residents to engage in the very same conduct.

3. Has Congress authorized state discrimination?

Maine could also potentially invoke a second defense against Wellness’s lawsuit. Federal courts have recognized that Congress may override the default rules they have created for the DCC. For example, in Northeast Bancorp, Inc. v. Federal Reserve, 472 U.S. 159 (1985), the Supreme Court declared that “When Congress so chooses, state actions which it plainly authorizes are invulnerable to constitutional attack under the Commerce Clause.” Among other things, this means that even blatantly discriminatory state laws may be upheld if Congress has authorized states to discriminate against non-residents in a given market.

Here, Maine could argue that Congress has (at least implicitly) authorized states to discriminate against outsiders in the marijuana market. After all, when Congress passed the Controlled Substances Act, one of its primary objectives was to quash interstate commerce in illicit drugs like marijuana. Indeed, even when the federal Department of Justice has disclaimed interest in enforcing the CSA’s ban on marijuana, it has warned that stopping interstate shipments of the drug remains a federal enforcement priority.

Maine could try to argue that Congress would approve of barring outsiders from entering its marijuana market, because it serves the CSA’s purpose of quashing inter-state commerce in the drug (at least in a weak way). To be sure, there might be other, less discriminatory ways Maine could do this (as noted above). But that may not matter for purposes of this defense. The state doesn’t have to satisfy the courts’ strict scrutiny test if this exception applies; rather, the state just has to convince the court that Congress has approved of its effort to keep outsiders out of its marijuana market.

There’s no guarantee the court will buy this argument – to invoke this particular exception to the DCC, courts commonly require a clear indication of congressional approval of state discrimination. But I think it’s a reasonable argument for Maine to make.

Cross posted at my Marijuana Law, Policy and Authority blog here.

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