New York’s beleaguered adult-use roll out suffered a temporary jolt on April 3, when a state judge struck down the entirety of the state’s adult-use regulations, only to restore them with a corrected, more limited order the next day.
Leafly Holdings Inc. (LFLY:NASDAQ), an online database of local cannabis dispensaries, sued the State of New York in September, alleging that the Office of Cannabis Management’s ban on third-party cannabis advertising violated the company’s First Amendment rights. Months later, the lawsuit would inadvertently upend New York’s legal weed market – at least for a day.
Leafly was only seeking relief from the specific regulations that barred third parties from accepting payments for marketing listings. Instead, Judge Kevin Bryant of the New York Supreme Court in Albany initially nullified all of OCM’s adult-use cannabis market regulations, calling the rulemaking “arbitrary and capricious.”
About 24 hours later, Judge Bryant amended his order to only apply to the market restrictions that Leafly originally challenged, but he still criticized the process.
“There is no indication that any evidence was actually placed before the administrative agency and there is no outline of the process that the agency followed when deliberating regarding the proposed regulations,” wrote Bryant in the updated order on April 4.
Before the updated filing, there was a lot of speculation about what it could mean for the market, but there were few voices that suspected that existing operators would have to close shop.
“I’m not surprised at all by the decision to invalidate the marketing and advertising rules, but it certainly surprised me and everyone else I’ve spoken to that the court struck down virtually all of the adult-use regulations, primarily because this was not the relief that plaintiffs asked for,” said attorney Jeff Schultz, a partner at Foley Hoag, shortly after the initial ruling.
“It’s unlikely this delays the roll out, but it certainly is a distraction for certain folks at OCM who are already stretched thin and busy with the processing of applications and awarding of licenses,” said Schultz, who heads the New York law firm’s cannabis practice.
Meanwhile, OCM has yet to issue a public statement since the original order has been updated.
“We are reviewing the decision and exploring all possible legal options,” said an OCM spokesperson in response to the initial ruling. The office did not respond to a follow-up email after the judge updated the order.
Schultz did predict positive results for the legal market in terms of eliminating what he called “Draconian regulations around marketing and advertising, which were not helping the regulated market compete with the illicit market.”
Judge questions rulemaking process
The roll out of New York’s adult use market has been marred with lawsuits and court orders that have repeatedly challenged social equity rules and license priority. The attack on third-party advertising rules is just the latest obstacle for the state.
It appears that while New York’s adult-use regulations have lived to see another day, this latest development further tarnishes the state’s dismal reputation in rolling out a legal cannabis market.
“I think most other regulations are untouchable at this point, but you never know. This is New York and we see unprecedented things,” said Fatima Afia of Rudick Law Group, in a webinar scheduled the day after the updated court order came out. She also noted that she believed that the original order was filed in error. “It was judicial overreach. There’s no way that it wouldn’t have been overturned.”
Afia also noted that even though the error seems to have been corrected, it could still have lasting effects on the legitimacy of the ongoing market.
“I do think this will instill less and less confidence in the process of OCM, and that’s not very good for the stability of the market,” she said.
During the case, the state provided an affidavit from OCM Policy Director John Kagia, but the court challenged this testimony because Kagia did not serve in his current position when the original challenged regulation was crafted. Bryant called out OCM’s testimony as being theoretical and after-the-fact to the actual rulemaking.
“In point-of-fact, there is nothing in the record to establish precisely how OCM developed the regulations, which staff members participated in the process or how they addressed the litany of issues that were raised not only by petitioners but by the other individuals who submitted comments,” Bryant wrote in the updated ruling.
The court found that the state failed to properly document its process when crafting the underlying regulations.
“Respondents have failed to submit any actual transcripts of meetings of the CCB (Cannabis Control Board) or other documentation regarding the development of the challenged regulations or the presentation of the proposed regulations to the CCB,” Bryant wrote. “They have also failed to submit any transcripts or meaningful minutes of CCB meetings that would enable this court to determine the factual basis or the reasoning supporting their decision to adopt the regulations.”
