The first legal attack against New York’s Conditional Adult Use Retail Dispensary (CAURD) licenses could be on shaky ground, but is it just the first of more attempts to challenge residency requirements in court?
New York, which has yet to set a start date for legal adult use sales, recently closed its application period for prospective retailers, during which applicants with cannabis convictions in the state were to be prioritized. As per state rules, priority was given to individuals with business and residential ties, as well as for those with cannabis arrest records in the state. Meanwhile, the First Circuit ruling against Maine’s residency requirement for medical cannabis operation ownership last August has opened the door for challenging other states’ ownership limitations.
No license awardees have been announced yet, but a prospective cannabis operator from Michigan sued the state of New York in the Northern U.S. District over a week ago, arguing that the priority for those with cannabis convictions from New York State unfairly biases the process against those from out of state, such as the plaintiff, whose cannabis conviction took place in Michigan.
[Read the complaint. Read the motion for restraining order.]
As per state regulations, at least 51% of the ownership of any entity applying must be held by one or more “justice involved” individual. This means that they have to have previously been convicted of a cannabis-related crime or be a direct family member of someone who has been convicted. The catch is that the violation must have occurred in New York state.
The state accepted applications for CAURD licenses from August 25 to Sept. 26. Eligibility required 30% ownership from someone with a “significant presence in New York State,” along with 51% ownership from “justice involved” individuals.
The complaint filed by Variscite NY One, reads, “Plaintiff faces the irreparable harm of being frozen out of the New York cannabis retail market, as the State of New York will issue only 150 storefront retail licenses, all of which will be issued under the CAURD Application Program Plaintiff challenges herein. Even if the State grants additional licenses at a later time, Plaintiff will have lost the advantages to first movers in a new market (like customer loyalty and prime business locations), and such damages cannot be adequately measured.”
The federal lawsuit leans on a decision from August’s First Circuit Court of Appeals, that tossed Maine’s requirement that ownership of medical cannabis licenses rest in the hands of state residents. The circuit court found that Maine’s residency requirement violated the U.S. Constitution’s dormant commerce clause, which bars state laws from hindering commerce between states. In essence, residency requirement laws for cannabis licenses get in the way of the commerce of investment dollars from out of state. Weed may not be able to cross state lines, but investment dollars in weed may.
Much like neighboring states, New York now faces legal action as it works through its initial round of license approvals for adult use cannabis.
Legal arguments aside, it appears that the plaintiff has already run afoul of proper protocol. The court denied the plaintiff’s motion for a temporary restraining order to block the issuance of retail licenses, primarily because they failed to properly notify the state of New York of their complaints before filing their lawsuits.
Even before the circuit court rendered a ruling, the case had implications across the country, such as when a federal judge in Missouri struck down that state’s residency requirement for cannabis licenses on Oct. 7, 2021, while Detroit, Michigan has repeatedly faced legal scrutiny of its priority for residents. Another federal case over Illinois residency requirements was filed last summer.
Ultimately, Variscite NY One argued that access to the first wave of customers is crucial to the survival of cannabis businesses in New York. Without that access, the plaintiff argues that it has no hope in surviving.
“Even if the plaintiff could somehow later enter the market, the delay in entering the market causes an irreparable harm,” wrote the plaintiff in their motion for a restraining order. “All advantages to early entrants in the market, such as access to customers who have not developed loyalty to other business, will have been claimed.”
The plaintiffs originally filed their complaint on the final day in which individuals could apply for New York retail cannabis licenses. Given how recently the window closed, the plaintiff argued that halting any issuances would not improperly burden the state.
“Plaintiffs doubt Defendants have even begun processing applications, and in any event, Defendants grant applicants 30 days to amend their applications in response to any deficiencies,” said the motion.
Aside from a general injunction against the state’s licensing process, the plaintiff sought a restraining order against any licenses being issued in any of five districts in the state where the plaintiff’s hopes to operate.
New York’s courts are split into 14 separate districts, of which the plaintiff said it was hoping to operate in the Finger Lakes, Central New York, Western New York, Mid-Hudson, and Brooklyn.
“Plaintiff seeks preliminary relief to prevent Defendants from awarding any cannabis retail dispensary licenses during the pendency of this litigation for the five geographic areas of New York where Plaintiff applied, as the number of allowable licenses per geographic area is limited and the loss of a new business opportunity cannot be adequately measured for monetary damages at the end of this litigation.”
Regardless of legal argument, the court denied the motion to restrain New York from issuing licenses because the plaintiff failed to properly notify the state of their lawsuit. The court found that the plaintiff let the state know that they filed a motion without specifying any demands or the nature of their motion. Basically, the plaintiff told the state they were mad without specifying why.
“Counsel has since advised the court by telephone that the motion papers were not provided, and that, instead, he gave notice only that a motion was filed,” wrote District Judge Gary Sharpe in an order. “In essence, Variscite seeks a TRO [temporary restraining order] without notice, despite its assertion to the contrary, but has not satisfied the court that the strict requirements of Rule 65(b) [the law regulating restraining orders] have been met.”
Judge Sharpe also noted that the plaintiff failed to properly notify defendants of its original complaint.
“Additionally, it is not apparent to the court that defendants have been served with the complaint, let alone the pending motion papers,” wrote Sharpe.
Both parties are expected to appear on video for a hearing Wednesday morning, October, 12, though as of this writing, the plaintiff has not yet filed a response to the order that it properly serve its complaint and motions as ordered by the court, by Oct. 7.
