Global Ganja Report

Legal action has blocked the issuing of several retail cannabis licenses in New York state, with a would-be entrepreneur arguing that equity measures favoring those with in-state cannabis convictions violate the US Constitution’s interstate commerce clause.

More than a year and a half after New York state legalized cannabis, the first retail licenses have finally been issued. But several more have been blocked by court order. The legal case appears to be a ploy by out-of-state money to break into the Empire State’s lucrative market—even if it means undermining the state’s ambitious “equity” program.

Meddling from Michigan?
The Cannabis Control Board of the New York Office of Cannabis Management (OCM) on Nov. 21 awarded 36 Conditional Adult-Use Retail Dispensary (CAURD) licenses. It was a first step toward what is projected to be a $5 billion market—potentially the largest in the country.

And not one of the licenses went to multi-state operators (MSOs). Twenty-eight went to people with past cannabis convictions, or family members with such convictions. Another eight went to non-profit organizations involved in questions of social justice—such as Housing Works, which helps provide housing for the HIV-positive. The first 150 license-holders are to be chosen for such criteria, and will be eligible to receive aid from a $200 million Social Equity Cannabis Investment Fund.

In a statement to the press, Control Board chair Tremaine Wright said: “With the first adult-use retail dispensary licenses in the hands of businesses and eligible nonprofits, we’ve ensured the first sales will be made at dispensaries operated by those impacted by the unjust enforcement of cannabis prohibition.”

However, the state is temporarily blocked from issuing 63 licenses because of an injunction in a federal lawsuit filed by what appears to be a Michigan-based company. The plaintiff, Variscite NY One, is challenging the eligibility requirements under the equity program on the basis that they violate the so-called “Dormant Commerce Clause” of the US Constitution. An interpretation of the Commerce Clause rather than an actual constitutional text, this refers to the prohibition against states passing laws that discriminate against or excessively burden interstate commerce. Variscite maintains that the equity program criterion of a cannabis conviction in New York falls into this category.

Bad break for Brooklyn
In the Nov. 10 decision, Judge Gary L. Sharpe of the US District Court in Syracuse barred the state from issuing retail licenses in five regions of the state—Brooklyn, Central New York, the Finger Lakes, the Mid-Hudson area and Western New York. So under those 28 licenses issued 11 days later, four New York City boroughs are to get dispensaries—Manhattan, Queens, the Bronx and Staten Island. But not Brooklyn, the most populous borough, with 2.6 million people.

These five regions were chosen by Variscite as areas it seeks to operate in but supposedly faces discrimination. The company is 51% owned by Kenneth Gay, who indeed has a past cannabis conviction—but in Michigan, not New York. And while Variscite is registered in Albany, the owners don’t seem live in New York state. The CAURD program requires applicants to have a “significant presence” in New York.

Judge Sharpe’s ruling only applies to licenses issued under the CAURD program, so Brooklyn and the other regions covered by the injunction still stand to get eventual dispensaries, even if Variscite prevails in the courts.

Queried about Variscite’s chances, the OCM only issued the following terse statement to Albany’s News10: “We don’t comment on pending litigation. The Office of Cannabis Management is committed to the Marijuana Regulation and Taxation Act’s goals of including those impacted by the state’s enforcement of cannabis prohibition in the market that we are building and we are additionally committed to getting New York’s cannabis supply chain fully operational. The Cannabis Control Board will soon have before it applications for the Conditional Adult Use Retail Dispensary license which will start closing that supply chain.”

300,000 pounds waiting in warehouses
This is not the first such legal battle for Michigander Gay—which has raised questions about his motives by voices in the cannabis industry. In 2020, he filed a similar suit via a company called Peridot Tree against the city of Sacramento, Calif.—again claiming its licensing program ran afoul of interstate commerce protections. He didn’t prevail in the district court, and is currently taking the case to the Ninth Circuit Court of Appeals.

Meanwhile, this hold-up is slowing down an already tortuous process in New York that has implications for cultivators as well as retailers. As Bloomberg reports, the state began issuing cultivation licenses to more than 200 farms this spring, and New York’s first legal harvest is now in—constituting some 300,000 pounds of cannabis flower. But with no legal dispensaries yet operating, it is all being warehoused—and is in danger of deteriorating. 

Challenges of supporting in-state operators
The state’s commitment to social equity and favoring small operators over MSOs is proving to pose some challenges. As the New York Times reports, companies already operating under the state’s medical cannabis program (including big-name MSOs like MedMen) would need to pay $5 million to get in on the adult-use market as wholesalers, and at least $3 million as retailers—with a wait of three years.

The New York Medical Cannabis Industry Association has raised “a number of serious concerns” over these regulations, and vowed to push for changes.

Neil Juneja, a Seattle-based attorney specializing in cannabis, told Cannabis Now that he does view New York’s limitation on out-of-state residents as burdensome: “This was first provided in Washington state and greatly reduced the ability to raise capital. Early state legalization, such as in Washington, had reasons to limit out-of-state access to the industry, such as questions of federal law. But it is no longer desirable to consider this kind of prohibition. Without adequate access to capital, the New York cannabis market is hobbled in its growth to a robust industry.”

As for more general limitations on vertical integration, Juneja has mixed views. “This provides both benefits and drawbacks. It creates a very competitive market for products, providing the consumer with a great deal of choice and better products. On the downside, it adds in additional costs, which hits the consumer in the wallet, and increases the cost gap between the black market and the (soon-to-be) regulated market.”

Double standards and the Commerce Clause
In a final ironic postscript to all this, Advance Media reports that MedMen brought suit in a New York federal court in October, arguing that its Gotham-based landlord Thor Equities could not demand back rent on a Chicago retail space because cannabis is illegal under federal law. The case was laughed out of court on Nov. 21.

It seems that for MSOs, cannabis is a legitimate interstate commodity only when they want it to be.

Cross-post to Cannabis Now

Image from GreenwhichMeanTime

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