The Second Circuit Court of Appeals ruled, in a 2-1 decision, that the dormant commerce clause of the U.S. Constitution applies to cannabis, despite the plant’s federally illegal status. The ruling throws yet another wrench into New York’s efforts to roll out adult-use dispensary licenses, while federal courts in other states hear the same challenge to state resident preferences.
“The dormant commerce clause prohibits state protectionism unless Congress clearly authorizes specific protectionist laws. The only thing Congress has clearly authorized by criminalizing marijuana is federal prosecution for the manufacture, distribution, and possession of marijuana. Congress has given New York no clear permission to favor its residents over others whose businesses skirt the federal drug laws,” wrote Circuit Judge Dennis Jacobs in a 46-page majority opinion released Aug. 12.
The Second Circuit vacated a federal court’s denial of a preliminary injunction that two applicants requested on Dec. 18, 2023 – the same day that New York’s second application window closed for adult-use cannabis licenses.
The lawsuit is one of several that California attorney Jeffrey Jensen has filed in various states challenging their social equity priority licensing regimes.
Jensen owns 49% of both companies, while Dante Kinsey owns 51% of Variscite NY Four and Justin Palmore owns 51% of Variscite NY Five. Both majority owners have prior cannabis convictions in California, but not in New York, which would have granted their applications priority status.
“Extra priority in the application queue is an economic benefit – especially because New York has indicated that only those earliest in the December Queue are likely to receive licenses,” wrote Jacobs. “If New York required in-state residency as a prerequisite to extra priority, there would be no doubt that it was discriminating against out-of-state economic interest.”
Chief Judge Debra Ann Livingston was less convinced than her peers on the bench. She argued that although the plaintiffs have a case to appeal their place in the December queue, the dormant commerce clause does not apply to a federally illegal market. She further argues that the majority’s opinion would permit interstate commerce for cannabis.
“Application of the dormant Commerce Clause would compel a state that has elected to permit an intrastate marijuana market to open that market to interstate commerce,” wrote Livingston in a 17-page dissenting opinion.
“A ‘nominal[ly]’ illegal market is still an illegal market—and thus one Congress does not want to exist,” she added.
Livingston drew a distinction between Congress allowing an illegal market to exist as tacit approval of legalization, rather than allowing states that legalize to serve as laboratories for legalization.
“Yet localized markets may be invaluable to Congress as it assesses the comparative costs and benefits of legalizing marijuana—and whether to do so at the national level,” she wrote.
The First Circuit Court of Appeals was the first to rule that the dormant commerce clause applies to cannabis business in 2022, when it ruled that the state of Maine improperly restricted medical cannabis licenses to in-state residents. In contrast, that prior ruling clarified that while cannabis remains federally illegal, the dormant commerce clause still applies to those who invest in cannabis.
The Second Circuit Court’s decision is the first to apply to an adult-use market.
New York licensing remains complicated
The state collected 1,603 applications in the November queue. Of those, 674 final licenses have been issued, along with 239 provisional licenses, as of the July 25 meeting of the Cannabis Control Board (CCB). There are still 321 applications under review, while 369 have been closed due to denial or because they were withdrawn.
In the December queue, 2,704 retail applicants are still awaiting review.
The plaintiffs in New York were challenging the legitimacy of the state’s Conditional Adult-Use Retail Dispensary (CAURD) licenses, along with all of the applications that were collected in November and December of 2023. The Second Circuit narrowed those claims for lack of standing against the CAURD and November applicants.
“No matter the order within the November Queue, every November Pool application will still be reviewed before review of Variscite’s December Pool applications. Variscite therefore cannot challenge the internal ordering of the November Queue.”
On the other hand, Variscite was able to successfully argue that the added requirement for the November pool of having to secure property, in effect, reserved that pool for New Yorkers, thus barring Variscite from taking part. The plaintiffs were able to demonstrate that they have standing to challenge the fact that November’s entire pool is set to be reviewed before those in December.
“But until New York dissolves the December Queue or purges all provisional applications from it, there is an Article III ‘live controversy’ between Variscite and New York,” wrote Jacobs.
With the case kicked back down to the Northern U.S. District of New York, it remains to be seen if state regulators will face yet another injunction
Conflicting rulings in federal courts
With two U.S. appellate courts now ruling that the dormant commerce clause applies to cannabis, thereby opening up interstate investment, their weight may impact at least five other cases filed by Jensen where district courts ruled the other way and are now pending in appellate courts.
In California, two district court judges have ruled the other way, sending the matter to the Ninth Circuit Court of Appeals.
U.S. District Judge Kimberly Mueller dismissed Peridot Tree Inc. v. City of Sacramento on Nov. 21, 2024, on the grounds that the dormant commerce clause does not apply to cannabis. Similarly, the Central U.S. District Court of California dismissed Variscite, Inc. v. City of Los Angeles on Feb. 4 this year.
Peridot Tree WA Inc. v. Washington State Liquor and Cannabis Control Board is also before the Ninth Circuit, after U.S. District Judge Tiffany Cartright dismissed the case. Oral arguments took place June 3, 2025.
Last year, Justyna Jensen sued Rhode Island regulators over the residency requirement in the state’s upcoming adult-use retail licensing process. That case is now in the First Circuit Circuit Court of Appeals after the lower court denied an injunction.
Defendants in Rhode Island and Washington both filed letters on Aug. 15, arguing that the Second Circuit ruling should not affect their cases against Jensen. Attorneys for Sacramento filed a similar letter Aug. 18.
Rhode Island’s Special Assistant Attorney General Chelsea Baittinger argued that in the New York case, the court found that the plaintiffs’ claims were ripe only because they had already applied for a license. In the case of Rhode Island, the state has yet to open its application window.
Washington’s Deputy Solicitor General Tera Heintz was more direct in her challenge.
“The majority opinion relied on an erroneous interpretation of the CSA as aiming to eradicate both intrastate and interstate cannabis markets, leading it to conclude that state laws advantaging intrastate cannabis markets conflict with the CSA,” she wrote.
Jensen also has a pending lawsuit in Maryland. The case is currently before the Fourth Circuit Court of Appeals after the lower court denied the plaintiff’s motion for an injunction. Oral arguments took place on Jan. 28. So far, the court has yet to render an opinion.
Jensen previously sued New York on behalf of Variscite NY One, challenging the requirement of a past in-state cannabis conviction for a CAURD license. The state settled the suit by awarding the dispensary a CAURD license in the Finger Lakes region.
