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Federal Court Signals Municipalities Cannot Give Preference to Residents for Marijuana Licenses

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Federal Court Signals Municipalities Cannot Give Preference to Residents for Marijuana Licenses

As we have previously reported, the city of Portland, Maine, has been the most prominent recent test case over municipalities seeking to favor their own residents in marijuana licensing. 

On August 14, 2020, a federal court granted a preliminary injunction in favor of out-of-state businesses claiming that the City’s licensing system unconstitutionally favored residents over non-residents by basing licensing decisions in part on whether an applicant is a Maine resident. August 14, 2020 Order, Wellness Connection v. City of Portland, Docket No. 2:20-CV-00208-NT (W.D. Maine). In granting the injunction, the court held that the City failed to justify that its residency preference was necessary to achieve a legitimate purpose, which the City argued “was to ensure that the City understood the amount and quality of oversight and could easily verify any past violations.” Id. at 24.

Portland’s ordinance used two grading criteria that the court found constitutionally infirm under the U.S. Constitution’s Dormant Commerce Clause. First, the City scheme awarded points to applicants majority-owned by individuals who have been residents of Maine for certain durations, e.g., five years. Second, the City scoring provided points to applicants based on its owners’ regulatory history in the state, i.e., whether they hold other business licenses in Maine and those businesses’ compliance or noncompliance with state law and regulations.

Apart from the court’s decision on the substantive Dormant Commerce Clause issue, two other aspects of its opinion warrant consideration by municipalities and would-be license applicants aggrieved by discriminatory criteria.  

First, Portland had argued that because the plaintiff businesses had not yet applied for or been denied a license, they lacked standing and their claims were not ripe. The court rejected these arguments, holding that the harm was “not the denial itself but the disadvantage [plaintiffs] face in obtaining a license.” The court also found that the claims were fit for review because they are legal rather than factual. Id. at 14. Furthermore, the court noted that withholding judgment until plaintiffs’ had applied or had their license actually denied could “throw a wrench in the [licensing] process” as it would likely change after-the-fact which applicants were qualified and unqualified. Id. at 15-16.

Second, Portland had argued that because marijuana is illegal under the federal Controlled Substances Act (“CSA”), Congress has exercised its power to prohibit marijuana under its commerce clause authority and thus marijuana commerce is not protected by the Dormant Commerce Clause. The court recognized that Congress can authorize states to take action that would otherwise run afoul of the Dormant Commerce Clause. The court decided, however, that “although the [CSA] criminalizes marijuana, it does not affirmatively grant states the power to burden interstate commerce in a manner which would otherwise not be permissible.” Id. at 21-22 (internal quote and citations omitted). The court also criticized the City for “actively and voluntarily creating a market for recreational marijuana sales on the one hand, while simultaneously labeling marijuana as contraband in order to justify discrimination against nonresidents who seek to participate in the market.” Id. at 21, n. 11.

This case may be a blueprint for marijuana businesses that face potentially adverse licensing decisions based on their residency status. Indeed, the same day the order in Wellness was issued, a marijuana business organized in Washington filed a complaint against the State of Oklahoma in federal court over a provision in Oklahoma’s medical marijuana law that restricts the ability of non-residents to receive a license or hold interest in a licensee.

Ultimately, the growing number of legal challenges and the success of plaintiffs in Wellness should give pause to states and municipalities that have implemented or are considering residency preferences in their marijuana licensing laws.

We will continue to follow these types of cases as they arise. Stay tuned to Dykema’s Cannabis Law Blog for further updates.