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Thursday, February 2, 2023

BREAKING: New York Federal Judge Blocks CAURD License in Five Districts

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On November 10, 2022, Judge Gary L. Sharp of New York Federal Court in Syracuse entered into an order ordering the application process for a New York retail cannabis dispensary in five areas of the state (Brooklyn, Central New York, Finger Lakes, Mid-Hudson and Western New York) for dispensary licenses for conditional adult use (“CAURD”).

Cannabis and the idle trade clause

This decision follows similar decisions by federal courts in other states that have found provisions in cannabis licensing rules that unfairly favor in-state residents over out-of-state residents in violation of the “idle commerce clause” of the US Constitution (“DCC”). We first analyzed exposure to DCC for programs like New York All the way back to 2015.

Briefly, the idle commerce clause refers to the prohibition, implicit in the commerce clause (Article 1, Section 8, Clause 3 of the United States Constitution), against states that pass legislation that discriminates against or excessively burdens interstate commerce. More specifically, the importance is to prevent protectionist state policies that favor a country’s citizens or corporations at the expense of non-citizens doing business within that country.

CAURD and idle trade clause

As we previously discussed (over here), all applicants for a CAURD license were required to demonstrate a significant presence in New York, either individually or through having a principal location of the company in New York. For entities, the requirement to “presence” in New York can be met by a majority ownership interest in the entity held by individuals who are physically present in New York for at least 180 calendar days in the current year, or 540 calendar days over the past three years.

Variscite . Litigation

The plaintiff in this action is Variscite, a company regulated under the laws of the State of New York that has applied for a CAURD license. However, if Variscite was 51% owned by an individual (majority owner) who had a cannabis conviction under Michigan law and had little connection to New York, it was determined that Variscite was not eligible to be selected for a CAURD license. The federal judge agreed with Variscite that the New York residency requirement discriminated against out-of-state applicants, and was not narrowly designed to serve binding state policy, thus violating the DCC enshrined in the Constitution.

During the Variscite application process, Variscite selected Brooklyn, Central New York, the Finger Lakes region, Mid-Hudson District, and Western New York as its areas for potential licensing. As such, the judge ruled that New York cannot issue CAURD licenses to operate dispensaries in those five (5) regions while the case is being heard. Based on the ruling, the ruling is expected to affect approximately 63 of the 150 CAURD licenses that the Office of Cannabis Management plans to issue by the end of this calendar year. Eleven other regions were not affected by the judge’s ruling, including the Bronx, Manhattan, Queens, Staten Island and Long Island.

What’s Next

This decision significantly hampers New York’s plan to start selling recreational cannabis this year. It is not clear how New York will proceed with CAURD licensing and/or whether it will continue to enforce the “presence” requirement for unaffected areas or any other type of license New York intends to grant for cannabis sales in the state.

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