Are Cannabis Licensee Residency Requirements Legal or Not?

Are Cannabis Licensee Residency Requirements Legal or Not?

While many states, including New Jersey, require cannabis licensees to reside in-state, the requirements could soon be a thing of the past...

While many states, including New Jersey, require cannabis licensees to reside in-state, the requirements could soon be a thing of the past. In recent months, several federal courts have concluded that laws imposing residency requirements on cannabis businesses are likely unconstitutional.

The biggest test to date will play out in the First Circuit Court of Appeals. The federal appeals court will consider whether to uphold a ruling by a federal judge striking down a State of Maine rule requiring that medical marijuana business licenses be held by residents.

Cannabis License Residency Requirements

Several states that have legalized medical and/or recreational cannabis impose residency requirements on cannabis businesses. For instance,  New Jersey’s Cannabis Regulatory, Enforcement Assistance, and Marketplace Modernization Act (Act) includes durational residency requirements for licensees. For a microbusiness license, the applicant must demonstrate that 100 percent of the ownership is comprised of New Jersey residents who have resided in the State for at least two years. For a standard adult-use license, applicants must demonstrate that their individual ownership includes a “significantly involved person” who has been an in-state resident of at least two years. 

In defending their residency requirements, state officials maintain that it is easier to conduct background checks on local individuals and entities. Proponents of giving preferential treatment to in-state residents also argue that local entities should be given the first opportunity to reap the financial rewards of cannabis legalization.

Legal Challenges Cite Dormant Commerce Clause

Out-of-state cannabis applicants are increasingly challenging the constitutionality of state cannabis licensing residency requirements. Many of the legal challenges argue that the requirements unfairly favor in-state residents to the detriment of non-residents in violation of the Constitution’s Dormant Commerce Clause, which prohibits states from enacting laws that discriminate or unduly burden interstate commerce unless those laws are narrowly tailored to advance a legitimate local interest. States, meanwhile, argue that the Commerce Clause does not apply because interstate commerce involving cannabis is effectively banned. In support, they cite the Controlled Substances Act (CSA), which prohibits cannabis on the federal level.

So far, the federal courts have largely been receptive to the arguments raised by out-of-state cannabis businesses. In Toigo v. Department of Health and Senior Service, a U.S. District Court Judge of the Western District of Missouri held that a Missouri Department of Health and Senior Services (DHSS) regulation mandating that medical cannabis businesses be majority-owned by state residents who have lived in the state for at least one year prior to application likely violated the Dormant Commerce Clause. Accordingly, it granted a preliminary injunction barring enforcement of the regulation.

While the court acknowledged that DHSS had a legitimate interest in enforcing its drug laws by conducting background checks on potential cannabis licensees and seeking to prevent the diversion of medical cannabis for recreational use, it also found that there were several non-discriminatory means available to further those interests. 

“It is no easier for a person who has lived in Missouri for less than a year to drive from Missouri to Kansas with medical marijuana in their trunk than it is for a person who has lived in Missouri for a year and a day,” the court wrote. “And it is no more difficult for a long-time Missouri resident to smuggle marijuana out of the medical system and into the recreational market than it is for anyone else.”

Similarly, in Lowe v. City of Detroit, a U.S. District Court Judge of the Eastern District of Michigan found that the City of Detroit’s residency requirement, which prioritizes applicants who have lived in the city for a longer time, was “unfair, irrational and likely unconstitutional.” It also granted a preliminary injunction, thereby preventing enforcement of the rule.

“At a minimum, the Ordinance must pass rational basis review to be deemed constitutional under both the United States and Michigan constitutions,” the court wrote. “However, the challenged provisions of the Detroit Ordinance do not appear to be rationally related to the stated purpose of rectifying the harm done to City residents by the War on Drugs.” The judge added: “As presently drafted, the Ordinance is far more protectionist than it is equitable.”

The case before the First Circuit, Wellness Connection v. City of Portland, Maine, challenges the City of Portland’s residency rule requiring that adult-use cannabis businesses demonstrate majority ownership by Maine residents of at least five years prior to applying for a cannabis facility license. The district court granted Wellness Connection’s motion for a preliminary injunction after concluding that favoring Maine residents over out-of-state applicants ran afoul of the Dormant Commerce Clause.

In support, the court cited similar decisions by other federal courts. “In apparently all cases where federal courts have confronted dormant Commerce Clause challenges to state or local laws that favor residents in the recreational or medical marijuana context, the courts have held that such laws are likely unconstitutional,” U.S. District Judge Nancy Torresen wrote. We will now find out if the First Circuit also supports that reasoning.

Key Takeaway

In light of recent federal court decisions, New Jersey’s durational residency requirements for cannabis licensees may face legal challenges and could be held unconstitutional. Cannabis businesses are advised to closely monitor this rapidly evolving area of law and contact a member of the Scarinci Hollenbeck Cannabis Law Group to determine how your business may be impacted.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact Dan McKillop or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.

This article is a part of a series pertaining to cannabis legalization in New Jersey and the United States at large. Prior articles in this series are below:

• House Committee Greenlights Cannabis Legalization Bill
• U.S. House (Again) Approves Cannabis Banking Reform Bill
• How Does New Jersey’s Cannabis Tax Stack Up?

Disclaimer: Possession, use, distribution, and/or sale of cannabis is a Federal crime and is subject to related Federal policy. Legal advice provided by Scarinci Hollenbeck, LLC is designed to counsel clients regarding the validity, scope, meaning, and application of existing and/or proposed cannabis law. Scarinci Hollenbeck, LLC will not provide assistance in circumventing Federal or state cannabis law or policy, and advice provided by our office should not be construed as such.