California cannabis social equity provisions and the dormant commerce clause

As states are exploring the possibility of interstate commercial cannabis arrangements, a collision looms (see Tommy Tobin & Andrew Kline, A Sleeping Giant: How the Dormant Commerce Clause Looms Over the Cannabis Marketplace, Yale L. & Pol'y Rev. Inter Alia (Jan. 3, 2022)) between local and state cannabis social equity laws and the dormant Commerce Clause of the U.S. Constitution. Oregon, for example, has enacted Senate Bill 582, which authorizes the Governor to enter into an "agreement with another state for ... coordination ... of marijuana-related businesses and cross-jurisdictional delivery of marijuana items" upon the occurrence of either one of two federal triggers: (a) federal law is amended to allow for the interstate transfer of marijuana items between authorized marijuana-related businesses; or (b) the USDOJ issues an opinion or memorandum allowing or tolerating the interstate transfer of marijuana items between authorized marijuana related businesses.

Last year, California enacted SB 1326, modeled after the Oregon bill, authorizing the Governor to enter into interstate cannabis agreements upon the occurrence of one of three federal trigger events or a state trigger. The three federal triggers in SB 1326 are: (1) federal law is amended to allow for the interstate transfer of cannabis or cannabis products between authorized commercial cannabis businesses; (2) federal law is enacted that specifically prohibits the expenditure of federal funds to prevent the interstate transfer of cannabis or cannabis products between authorized commercial cannabis businesses; or (3) USDOJ issues an opinion or memorandum allowing or tolerating the interstate transfer of cannabis or cannabis products between authorized commercial cannabis businesses. The state trigger occurs if the California Attorney General issues an opinion that an interstate cannabis agreement will not result in significant legal risk to the State of California under the federal Controlled Substances Act. See Jan. 27, 2023 Letter from California Department of Cannabis Control to California Attorney General.

Washington state is considering HB 1159 authorizing the Governor to enter into interstate cannabis agreements upon the occurrence of federal trigger events, and New Jersey is looking at State Legislature Bill S3012 permitting the Governor to authorize interstate commercial cannabis activity under certain circumstances. As Oregon and California and possibly Washington and New Jersey and other states look toward interstate commerce for cannabis, the United States federal judiciary has sharpened its focus on the constitutionality of certain provisions of state and local administrative schemes for commercial cannabis.

In California, as well as in both Oregon and Washington, federal cases have been filed challenging cannabis social equity provisions on dormant Commerce Clause grounds. California, whose local cannabis regulations often include social equity provisions, is also attracting scrutiny under the dormant Commerce Clause, scrutiny that may disrupt the cannabis administrative schemes of local California governments and the state government under SB 1326 as California moves toward legislatively authorized interstate cannabis commerce between and among states.

The Commerce Clause is not only an affirmative grant of authority to Congress to regulate interstate commerce but also a negative, "self-executing limitation on the power of the [s]tates to enact laws [that place] substantial burdens on [interstate] commerce." S.-Cent. Timber Dev., Inc. v. Wunnicke, 467 U.S. 82, 87 (1984). This "dormant" Commerce Clause, enables the courts to protect interstate commerce from "the evils of 'economic isolation' and protectionism" under state regulation (City of Philadelphia v. New Jersey, 437 U.S. 617, 624 (1978)), even in the absence of congressional regulation, i.e., when Congress's exercise of its Commerce Clause power is dormant. (See Dormant Commerce Power: Overview, U.S. Constitution Annotated, Legal Information Institute, Cornell Law School.)

The Supreme Court has adopted a two-tiered approach to determining whether a state statute violates the dormant Commerce Clause. (Brown-Forman Distillers Corp. v. N.Y. State Liquor Auth., 476 U.S. 573, 578-79 (1986); see also Ass'n Des Eleveurs De Canards et D'Oies Du Quebec v. Harris, 729 F.3d 937, 948 (9th Cir. 2013) (applying the Supreme Court's test in Brown-Forman)). First, if a state statute directly discriminates against interstate commerce, or when its effect is to favor in-state economic interests over out-of-state interests, the Supreme Court has generally struck down the statute without further inquiry. (See City of Philadelphia v. New Jersey, 437 U. S. 617, 624 (1978).) Plainly discriminatory laws fall into this category and are subject to an almost per se rule of invalidity. (See Dep't of Revenue of Ky. v. Davis, 553 U.S. 328, 338 (2008); see also Robert A. Mikos, Interstate Commerce in Cannabis, 101 B.U. L. Rev. 857, 862-63 (2021).) Second, where a statute has only indirect effects on interstate commerce and otherwise regulates evenhandedly, the Supreme Court has examined whether the State's interest is legitimate and whether the burden on interstate commerce clearly exceeds the local benefits. (Brown-Forman Distillers Corp. v. N.Y. State Liquor Auth., 476 U.S. at 579; see also Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970).)

In general, state statutes that discriminate in favor of in-state citizens and against citizens of other states have been found to violate the dormant Commerce Clause. (Tennessee Wine & Spirits Retailers Association v. Thomas, 139 S.Ct. 2449, 2476 (2019) (striking down statute requiring residency for licensure to participate in state's regulated alcohol distribution market).) More specifically, most federal district courts to consider the issue have held that residency requirements in cannabis state statutes and local ordinances violate or may violate the dormant Commerce Clause. See, e.g., Variscite NY One, Inc. v. New York, (N.D.N.Y. Nov. 10, 2022) (granting plaintiff's motion for preliminary injunction after concluding that plaintiff was likely to succeed on its argument that certain of New York's cannabis licensing residency requirements violated the dormant Commerce Clause), but see Mar. 28, 2023 Order, Case No. 22-3128, (limiting injunction pending appeal); Toigo v. Dep't of Health and Senior Servs., (W.D. Mo. 2021) (Missouri's cannabis licensing residency requirements); Lowe v. City of Detroit, 544 F. Supp. 3d 804 (E.D. Mich. 2021) (Detroit's cannabis licensing residency requirements); Finch v. Treto, No. 22 C 1508, (N.D. Ill. June 9, 2022) (Illinois cannabis licensing residency requirements); Attitude Wellness, LLC v. Vill. of Pinckney, (E.D. Mich. Apr. 7, 2022) (Village of Pinckney's cannabis licensing residency requirements). Similarly, the only federal Court of Appeals to consider the issue has held that Maine's cannabis residency requirements violated the dormant Commerce Clause. Ne. Patients Grp. v. United Cannabis Patients & Caregivers of Me., 45 F.4th 542 (1st Cir. 2022). In that case, the First Circuit rejected Maine's argument that because federal illegality of cannabis makes the cannabis market non-existent as a legal matter, the dormant Commerce Clause was inapplicable to cannabis commerce. Noting that both the U.S. Supreme Court - in Gonzalez v. Raich, 545 U.S. 1, 18 (2005) - and the U.S. Congress - in the Rohrabacher-Farr Amendment (H.Amdt.332 to H.R. 2578.) - have recognized the existence of a cannabis market despite the prohibitions of the Controlled Substances Act, the First Circuit found the dormant Commerce Clause prohibited protectionist laws like Maine's cannabis state residency requirement. Ne. Patients Grp., 45 F.4th at 547-548. This pragmatic approach taken by the First Circuit recalls the statement from Justice Clarence Thomas in the denial of certiorari in the Standing Akimbo case. (Standing Akimbo, LLC v. United States, 549 U.S. ___ (June 28, 2021) (Case No. 20-645).)

Three federal district courts have taken a different path. In Peridot Tree, Inc. v. City of Sacramento, No. 2:22-cv-00289-KJM-DB (E.D. Cal. Oct. 17, 2022), the district court refused to rule on the plaintiff's challenge to a local ordinance, and instead invoked abstention principles to require the plaintiff to pursue its claims in state court or in an "administrative venue." In Original Investments, LLC v. State of Oklahoma, 542 F.Supp.3d 1230, 1235 (W.D. Okla. 2021), the district court dismissed the case, concluding that it could not grant relief that would effectively sanction violation of federal law, saying that "[g]ranting plaintiff the equitable relief it seeks here would facilitate criminal activity (by allowing non-residents to have medical marijuana business licenses) more than would a denial of equitable relief." (Original Investments at 1235.) And in Brinkmeyer v. Wash. State Liquor & Cannabis Bd., C20-5661 BHS (W.D. Wash. Feb. 7, 2023), the district court concluded, contrary to the holding of the First Circuit, that the dormant Commerce Clause does not apply to Washington State's cannabis market due to the illegality of cannabis under federal law. In Original Investments and Brinkmeyer, the illegality of cannabis under federal law was dispositive and resulted in the courts' finding that the dormant Commerce Clause did not apply to prevent enforcement of cannabis social equity laws. Original Investments, 542 F.Supp.3d 1230, 1235; Brinkmeyer, C20-5661 BHS.

The Peridot Tree abstention decision now sits with the Ninth Circuit on appeal, and although the Ninth Circuit could in theory agree with the district courts in Original Investments and Brinkmeyer that the dormant Commerce Clause does not apply to cannabis residency requirements (allowing the undisrupted enforcement of the cannabis social equity requirements in Sacramento and throughout California), this would result in a split with the First Circuit and would be against the weight of federal judicial authority. Arguing against abstention, Peridot Tree says its case against the City of Sacramento would not disrupt California's administrative scheme for cannabis. (Appellants' Opening Brief, Peridot Tree, Inc. v. City of Sacramento (9th Cir. Case No. 22-16783), filed Feb. 23, 2023, at 29-31.) It is worth observing, however, that at the same time the Peridot Tree plaintiff is challenging the City of Sacramento's cannabis social equity provisions, the same plaintiff is prosecuting a dormant Commerce Clause challenge to cannabis social equity regulations promulgated by the City of Los Angeles. (Variscite v. City of Los Angeles, Case No. 2:22-cv-08685-SPG-SK (C.D. Cal. Apr. 11, 2023). And the City of Los Angeles is not the only California local jurisdiction with a cannabis administrative scheme featuring residency-based social equity requirements. Indeed, of the over a dozen cities and counties in California that have enacted cannabis social equity ordinances (Local Equity Ordinances, Governor's Office of Business and Economic Development, State of California), at least eight (8) of these local jurisdictions (City of Richmond, City of Long Beach, City of Oakland, City & County of San Francisco, City of San Jose, City of Los Angeles, City of Sacramento, and City of Watsonville) incorporate some type of geographic location-based residency or residency-like requirement within their cannabis administrative schemes. Given the findings in the equity studies conducted by these jurisdictions that included details of the harm suffered by residents of these jurisdictions, it is unsurprising that these jurisdictions' cannabis social equity provisions are worded in a way to attempt to address the harm suffered by these residents. (See, e.g., City of Sacramento Cannabis Equity Study (2018), City of Los Angeles Cannabis Social Equity Analysis Report (2017), City and County of San Francisco Cannabis Equity Report (2017), City of Oakland Equity Analysis (2017).)

For example, the City of Oakland's administrative scheme for cannabis (Ordinance 13504, Oakland City Council) defines an "Equity Applicant" as an Applicant who:

[i]s an Oakland resident; and ... Either (i) has lived in any combination of Oakland police beats ... for at least ten of the last twenty years or (ii) was arrested after November 5, 1996 and convicted of a cannabis crime committed in Oakland, California.

(Oakland Municipal Code Section 5.80.010(I).) Similarly, under the City & County of San Francisco's cannabis administrative scheme, an "Equity Applicant" must meet at least three of six criteria including having: experienced housing insecurity in San Francisco; attended a San Francisco Unified School District school; and lived in certain San Francisco census tracts. (San Francisco Police Code Section 1604.) Plainly, these cannabis social equity provisions include geographic residency requirements like the provisions challenged by the plaintiffs in Peridot Tree and are unlikely to survive if the Ninth Circuit agrees with the plaintiffs in Peridot Tree.

There are social equity provisions promulgated by other California jurisdictions that might present closer calls when scrutinized under the dormant Commerce Clause. For example, under the Cannabis Equity Program promulgated by the City of Santa Cruz, the eligibility criteria limit participation in the program to owners who can demonstrate support of the "community" without explicitly calling for residence within the Santa Cruz community as a requirement for participation. (City of Santa Cruz Cannabis Equity Program, Sec. 7.136.070.) Unlike the geographic residency requirements of other jurisdictions like Oakland, San Francisco, Sacramento or Los Angeles, these other social equity provisions, which arguably do not on their face discriminate against out-of-state actors, might satisfy the balancing test articulated by the United States Supreme Court and thus survive dormant Commerce Clause scrutiny. (See Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970).) Nonetheless, if the Ninth Circuit agrees with the plaintiffs in Peridot Tree that the dormant Commerce Clause applies to commercial cannabis, even these other administrative schemes could be forced to show in any challenge that the local benefits of their social equity provisions are not clearly outweighed by any burden on interstate commerce, passing the Pike Balancing Test, articulated by Justice Potter Stewart who said:

[w]here the statute regulates evenhandedly to effectuate a legitimate local public interest, and its effects on interstate commerce are only incidental, it will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits. If a legitimate local purpose is found, then the question becomes one of degree. And the extent of the burden that will be tolerated will, of course, depend on the nature of the local interest involved, and on whether it could be promoted as well with a lesser impact on interstate activities.

(Pike v. Bruce Church, Inc., 397 U.S. at 142.) If the Ninth Circuit agrees with the plaintiffs in Peridot Tree, then these other California jurisdictions will - in any dormant Commerce Clause challenge - at the very least need to show that the burden of their social equity provisions on interstate commerce is not clearly excessive in relation to the local benefits of these provisions. (See Pike, 397 U.S. 137 at 142.)

At the state level, Senate Bill 1326 requires the California Governor to include in any interstate cannabis agreement "provisions ... to promote the ... support of individuals and communities in the cannabis industry who are linked to populations or neighborhoods that were negatively or disproportionately impacted by cannabis criminalization." (California Business and Professions Code Section 26305.) If the Ninth Circuit agrees with the plaintiffs in Peridot Tree, then this provision of Senate Bill 1326 - or the provisions it generates - could also face a dormant Commerce Clause challenge, restricting California's ability to negotiate interstate cannabis agreements consistent with the intent behind SB 1326.

In addition to the Ninth Circuit's decision in Peridot Tree, there is also an appeal pending in the Second Circuit from a district court decision based on the dormant Commerce Clause to enjoin the issuance of commercial cannabis licenses in an area of New York with residency-based regulations. (Variscite NY One, Inc., v. State of New York, New York State Office of Cannabis, Docket No: 22-3128.) And a federal court in Oregon will soon consider a motion to dismiss a dormant Commerce Clause challenge to that state's cannabis regulatory scheme. (Jefferson Packing House, LLC v. Kotek et al, Cause: 28:1331, CASE # 3:22-cv-01776-AR.) The briefing and decisions in these cases will come to the fore as the Ninth Circuit decides how to handle the plaintiffs' appeal in Peridot Tree and whether California's cannabis social equity efforts can withstand scrutiny under the dormant Commerce Clause.

Local California jurisdictions that have adopted cannabis social equity provisions as part of their administrative schemes for cannabis have done so after taking a hard look at the damage inflicted on their communities by the failed War on Drugs. These social equity provisions often include geographic residency provisions designed to support members of these communities who have suffered disproportionate damage, and even when the provisions do not on their face discriminate against out-of-state actors, local governments may be forced to demonstrate that the benefits of these social equity provisions are not clearly outweighed by any burden on interstate commerce. As California moves toward interstate cannabis commerce, and courts grapple with whether cannabis social equity provisions can withstand scrutiny under the dormant Commerce Clause, the Ninth Circuit stands poised to render its opinion potentially calling into question the Constitutional viability of many California cannabis administrative schemes and laws designed to promote social equity in commercial cannabis.