There are many unique challenges to consider when it comes to opening or investing in a cannabis business. Residency requirements, or prohibitions on licensure of nonresidents, are one that may soon see their end. In other industries, requirements that business licenses be reserved for residents of a certain state are largely a thing of the past, having been rejected by courts as violations of the dormant commerce clause — a legal doctrine, which holds that a state law discriminating against out-of-state goods or nonresident economic actors can stand only if it is narrowly tailored to promote a legitimate local purpose. As recently as 2019, this doctrine was invoked to overturn Tennessee’s residency requirement for liquor store licenses. In Tennessee Wine and Spirits Retailers Assn. v Thomas, the Supreme Court held that Tennessee had no compelling interest to prevent nonresidents from holding Tennessee liquor licenses.
When it comes to cannabis, however, dozens of states and municipalities have enacted and enforced residency requirements that bar or restrict nonresidents from holding licenses or portions of licenses, and in some cases, even from investing in local cannabis businesses. Most of these laws intend to promote local ownership, while also acting as a strategy to minimize federal interference with a state’s (interstate) cannabis program. Most of the laws have gone unchallenged, and some courts have been unwilling to interfere due to cannabis’ federally illegal status. The U.S. District Court for the Western District of Oklahoma, for instance, recently granted the state’s motion to dismiss a challenge to its residency requirements. The court ignored the dormant commerce clause question and dismissed the case so as not to use its equitable power to “facilitate criminal activity.”
Preliminary challenges to such rules have recently seen a string of successes, however. The U.S. District Court for the Western District of Missouri permanently enjoined the state from enforcing its requirement that applicants be majority owned by state residents; the U.S. District Court for the Eastern District of Michigan granted a preliminary injunction, barring Detroit from giving preferential treatment to Detroit residents; and the U.S. District Court for the District of Maine enjoined the state from enforcing its prohibition on nonresidents serving as directors, officers, or owners of a dispensary (in 2020, the same court prevented the city of Portland, ME from awarding points for residency in its dispensary licensing contest).
Northeast Patients Group et. al. v. Figueroa, which Maine appealed to the First Circuit, is the first cannabis residency rule challenge to make it to a circuit court of appeals. As such, it could set a precedent that begins to topple these rules across the country. Plaintiffs High Street Capital Partners, a company owned entirely by non-Maine residents, sought to acquire Wellness Connection, a dispensary owned by all-Maine residents. The transaction was prohibited due to Maine’s requirement that all officers or directors of a dispensary be Maine residents. The lower court agreed that the residency requirement violates the dormant commerce clause and granted an injunction against its enforcement. It later granted a stay against its own injunction, pending the matter’s appeal in the First Circuit (the district court found that temporarily allowing out-of-state residents into Maine’s cannabis market could have irreparable harm if the First Circuit ultimately upholds the residency requirement). The state’s appeal brief is due in circuit court on December 20.
Another case to watch is Brinkmeyer v. Washington State Liquor and Cannabis Board, a challenge to Washington state’s residency rules. They provide that a nonresident may not own any stake in a Washington cannabis business and have challenged would-be entrants to this major West Coast market since the adult-use program’s inception. While the plaintiff’s constitutional law claim was dismissed this year due to lack of standing, the federal constitutional claims have yet to be resolved and could end up before the Western District of Washington later this year or early next.
Even if general residency requirements do not survive constitutional scrutiny, it still remains to be seen whether such requirements can prove to be narrowly tailored and in advance of a legitimate local purpose in the context of social equity programs, which reserve social equity licenses for residents of a certain state (or city). Regardless, the potential overturn of general residency requirements in the cannabis industry will usher in a new era of expansion for multistate operators, as well as fierce competition for local cannabis businesses that have benefitted from this period of protectionism.
Sean Hocking
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