Federal Court: Cannabis Licensee Residency Requirements (Which are Dumb) are Probably Unconstitutional

One interesting thing about cannabis law is how so much of it ties into “first principles”, or bedrock tenets of the U.S. Constitution. We lawyers spend our days papering deals and suing folks (always with good cause) and defending clients from lawsuits (which are always BS), so we seldom revisit first principles. But these principles include massively important things like conflicts in law arising from the Constitution’s Supremacy Clause (favoring the federal government), versus the states’ “reserved” rights under the Tenth Amendment. In the case of today’s blog post, the Constitutional issue is the Dormant Commerce Clause (“DCC”) as relates to cannabis residency requirements. A federal court in Missouri just put a freeze on those requirements.

Before I get going on this, I’d like to confirm I’m not a litigator and I’m certainly no great Constitutional law scholar. The closest I get to either of these things is: 1) writing tough letters before handing a file to one of the very smart litigators we are lucky to have at the law firm, and 2) teaching a Cannabis Law & Policy course here at the local law school. Other than that, I mostly give people business advice and help them solve problems out of court.

Anyway, the DCC is a fascinating little point of law we’ve been noodling on this blog since at least 2015. The DCC is sourced from the U.S. Constitution, but is not actually written there. Instead, the DCC is a judicial doctrine that courts have inferred from the (non-dormant) Commerce Clause in Article I. Briefly, the DCC prohibits state legislation that discriminates against interstate or international commerce. Our favorite example? Residency requirements in the case of cannabis business ownership.

In addition to arguing that nativist ownership rules are legally questionable, our position generally has been that restrictions on residency are a bad idea. They are terribly hard to draft (and often drafted by lawyers without business chops, to boot); they are harder to enforce; and they seldom achieve their desired, protectionist results. People game them like crazy! But if you goal is to prevent someone from taking a loan from their out-of-state grandmother to launch a small business, or if you want to ensure that minority communities with limited access to capital have an even smaller chance at succeeding, then residency requirements, I suppose, are great.

When we do find ourselves working in residency requirement states (like Washington) what we’ve generally found is that there is simply more work for lawyers and regulators, while industry suffers. In my view, Oregon was basically a fiasco until residency requirements were abolished back in 2016. Everyone ought to follow suit. Eventually, they will; and eventually, these exclusionary requirements will go the way of federal cannabis prohibition.

Anyway, back to this federal court ruling. Given what I’ve written above, I was happy to see this important decision come down a few days ago. On June 21, the U.S. District Court for Western District of Missouri, Central Division, preliminarily enjoined (blocked) the local regulatory body from enforcing that state’s ill-conceived 51% residency ownership requirement. The court’s basic rationale is that Mark Togo, the plaintiff suing to strike down the residency requirement, is likely to prevail at the end of this lawsuit on DCC grounds. Because of this ruling, the Missouri Department of Health and Human Services (DHSS) is not allowed to enforce the residency requirement against Mr. Togo or anybody else until the case is fully adjudicated or settled.

I’ll be interested to see if DHSS pursues the time-honored administrative strategy of slow-walking transactions during the pendency of litigation, or if the agency will stand down on this bozo rule. The latter course of action is what Maine followed last year. That state was also sued on a DCC theory with respect to its residency requirement. In response, the state (on advice from its lawyers) decided to cease enforcement of residency rules altogether. Presumably, Maine is now like Oregon or California or Nevada or any of the other common sense states that don’t discriminate against their neighbors.

Is the Missouri lawsuit ultimately going to succeed? Hard to say. Like I said, the ruling is promising in that the court feels Mr. Togo is likely to prevail (and the court only required that he post a $10,000 bond, which is small as far as these things go). That said, other plaintiffs in other states have failed. In Oklahoma, for example, a federal judge recently threw out one of these DCC lawsuits by a Washington plaintiff, holding that the state is protected from the lawsuit by the Eleventh Amendment. So it’s possible we are teed up for a circuit split, as the litigators say.

We’ll keep you posted on this interesting topic. In the meantime, for more on cannabis and the DCC, check out the following blog posts: