Federal court strikes down 'restorative justice' aspect of NYS cannabis licensing law

New York State’s plan to prioritize giving cannabis licenses to operators with low-level marijuana convictions in their past is illegal, a federal appeals court has ruled.

The U.S. Second Circuit Court, located in Manhattan, ruled the state’s "scheme" for giving first dibs to certain business owners is a "protectionist" measure that violates the federal commerce clause. The 2-1 ruling was handed down Tuesday.

It wasn’t clear if the ruling, which could be appealed, would have an immediate impact on the about 450 licensed cannabis retail shops in the state. But it certainly could alter licensing going forward in New York and elsewhere.

A spokeswoman for the state Office of Cannabis Management declined to comment, saying the agency was reviewing the court decision. The governor's office also is reviewing the decision and monitoring the situation, a spokeswoman said.

Approximately 60 Long Island retailers had been granted licenses by the state through the priority initiative as part of the Conditional Adult Use Retail Dispensary program, as of a February 2024 update published on the OCM website. Numbers weren’t available immediately regarding a related program, called the Social and Economic Equity initiative.

The federal court ruling is the latest blow for what’s been a troubled rollout of the state’s cannabis program.

The lawsuit was filed by a company called Varisite NY Four and Varisite NY Five, two limited liability companies majority owned by California residents, that have sued over other New York cannabis regulations.

Varisite claimed putting some New York applicants at the head of the licensing queue violating the dormant Commerce Clause, which essentially blocks states from giving preferential treatment to instate residents.

New York lawmakers wanted to give preferential treatment to applicants with previous marijuana convictions or below certain income thresholds as a "restorative justice" initiative after marijuana was legalized in the state.

The federal judges agreed, however, with Varisite.

"New York argues that its scheme does not violate the dormant Commerce Clause because its purpose is restorative justice, not economic protectionism; that in any event, the Clause does not bear upon its licensure scheme because marijuana is a federally illegal drug," Judge Dennis Jacobs wrote for the majority.

"We hold ... the dormant Commerce Clause applies and Congress has given New York no clear permission to enforce protectionist marijuana licensing laws; and that New York’s prioritization of applicants with convictions under New York law is a protectionist measure that cannot stand," Jacobs concluded.

This is the second federal ruling invoking the Commerce Clause and a state licensing program. Like New York, Maine saw its attempt to prioritize instate residents for its medical marijuana licenses struck down.

Jeffrey Hoffman, an attorney and board member of the New York Cannabis Retailers Association, said the ruling likely will be prospective — impacting pending New York applicants rather than existing stores.

"I don’t think they’ll go around closing open stores," Hoffman said.

That said, it might impact untold numbers of applicants who were in line to get licenses and open shops but haven’t done so yet. Hoffman estimated the number possibly in the thousands.

Beyond New York, a federal fight is brewing.

"This has a bigger implication than just New York," Hoffman said. Counting the Maine case and another lawsuit out West, the issue could be headed for the U.S. Supreme Court, he said.

"As for the big picture, this could be the first time the (Supreme Court) starts to weigh in on cannabis, specifically," he said.

New York’s cannabis program has been beset by regulatory stumbles and lawsuits, all while struggling to shutter the thousands of illegal retailers who sprouted when the licensing program was slow to grow.

Earlier this month, OCM told more than 80 shops to close because the agency itself had misinterpreted the law about how close they could be to a school grounds, as opposed to a school building. Gov. Kathy Hochul has indicated the State Legislature might amend statutes to correct the error and avoid closures or relocations.

By Yancey Roy

yancey.roy@newsday.com@yanceyroy