Second Circuit ruling challenges state’s social equity approach and could reshape cannabis markets nationwide

A federal appeals court has upended New York’s cannabis licensing system by ruling that it illegally favors local applicants over those from other states. On August 12, 2024, the U.S. Court of Appeals for the Second Circuit found that the state’s “extra priority” model—a key part of its effort to promote social equity—violates the dormant Commerce Clause. This decision challenges the delicate balance between restorative justice and constitutional protections while sending ripples throughout the nation’s evolving cannabis market.

What Did the Court Decide?

The Heart of the Ruling

The Second Circuit’s decision focused on New York’s provision that grants “extra priority” to applicants with a history of cannabis-related convictions under New York law. The court determined that this requirement acts as a proxy for New York residency, effectively discriminating against out-of-state applicants. As Circuit Judge Dennis Jacobs put it, “The requirement for a conviction under New York law represents a proxy for New York residency,” underscoring that local applicants were given an unfair advantage over others.

Explaining the Dormant Commerce Clause

The dormant Commerce Clause is a judicial doctrine designed to prohibit state laws that unduly restrict interstate commerce. In this case, the court ruled that the licensing scheme not only burdens interstate trade but also misuses state power to favor local businesses. The court rejected the state’s assertion that the goal was purely restorative justice:

“A prohibition intended to eradicate an interstate market is not a license for states to incubate intrastate markets in the same product.”

This clear statement from the bench reinforces that, without explicit congressional approval, states cannot enact measures that shield their local markets from out-of-state competition.

How New York’s Cannabis Law Works

The Framework of the MRTA

New York’s Marihuana Regulation and Taxation Act (MRTA), enacted in 2021, created a dual licensing structure intended to foster a competitive and socially equitable cannabis industry. The law divides cannabis businesses into two tiers:

• A tier for cultivation, processing, and distribution licenses
• A separate tier for retail licenses, ensuring no single company controls the entire cannabis supply chain

This separation was designed to prevent monopolies and to promote opportunities for small businesses and communities historically harmed by prohibition.

The December Pool and “Extra Priority” System

The MRTA established a special licensing window known as the “December Pool” specifically for provisional adult-use licenses. Applicants in this pool could receive “extra priority” by meeting strict criteria—including having a marijuana-related conviction under New York law prior to March 31, 2021. In theory, these measures support restorative justice by giving those most impacted by previous cannabis laws a head start in entering the legal market. However, the system also excludes qualified applicants with similar backgrounds from other states, setting the stage for legal challenges.

The Lawsuit: Variscite NY vs. New York

Plaintiffs’ Arguments

Variscite NY, a company with majority out-of-state ownership, challenged the “extra priority” rule after being sidelined in the licensing lottery. The plaintiffs contended that:

• The residency-based preference violates the dormant Commerce Clause by discriminating against out-of-state applicants.
• The policy selectively favors New York residents, rather than providing a uniformly accessible market for those affected by cannabis prohibition.
• The state’s approach, in its effort to serve a social equity objective, unjustifiably restricts competition.

A representative from Variscite NY explained, “The state’s policy unfairly blocks people with similar life experiences from participating in the market simply because they don’t have a New York conviction.”

The State’s Defense

New York’s Cannabis Control Board and the Office of Cannabis Management countered by stressing the law’s equity-driven purpose. They argued that:

• The licensing rule was designed as an essential step to redress the harms of the war on drugs.
• The criteria were in line with the MRTA’s goal of ensuring communities disproportionately impacted by cannabis prohibition could benefit from legalization.
• Variscite NY lacked the standing to contest the system because it did not meet the specific requirements to apply for these licenses.

Despite these points, the court’s majority found that the state’s policy overstepped constitutional bounds by discriminating against interstate commerce.

The Divided Opinion

The ruling featured a notable split. While the majority found the residency requirement unconstitutional, dissenting Chief Judge Debra Ann Livingston argued against applying the dormant Commerce Clause to a market still outlawed under federal law. Livingston maintained that the state’s measures aimed to discourage a federally prohibited market and that “it makes no sense to apply a legal doctrine that would force New York to open that market using a federal justification.”

What This Means for New York and Beyond

Immediate Impact on New York

The court’s decision directly affects the “extra priority” portion of New York’s provisional licensing process. With the case remanded to the U.S. District Court, the state now faces pressure to revisit its licensing framework. This could delay new dispensary openings and force regulators to develop alternate methods to support social equity without breaching constitutional protections.

Broader Effects on Social Equity Programs

States across America have adopted similar measures to aid communities hit hardest by historical cannabis policies. The Second Circuit’s ruling sets a precedent that challenges these state-level initiatives. For states like California, Maryland, and Washington, similar lawsuits could emerge if residency-based preferences persist. Lawmakers may need to pivot from strictly residency-based criteria to more universally applicable factors, such as income-based measures or community impact assessments.

Shaping the Future of Interstate Cannabis Commerce

The decision has far-reaching implications for how cannabis is traded across state lines. By invalidating protectionist measures, the ruling encourages a more open market where out-of-state businesses can compete fairly. Although cannabis remains federally illegal, this ruling intensifies calls for Congress to clarify the legal framework, potentially paving the way for future federal reforms. One industry analyst noted, “This decision is a wake-up call for states: you can’t wall off your markets forever.”

Counterarguments and Challenges

Critics argue that dismantling residency-based preferences may undermine essential social equity goals. Advocates worry that removing these mechanisms will limit opportunities for those most scarred by decades of systemic injustice. They stress that while the court’s decision ensures constitutional compliance, it may also inadvertently reinforce barriers for marginalized communities seeking to join the legal cannabis market. Until Congress acts to resolve the federal-state legal divide on cannabis, states will continue grappling with the competing goals of equity and open commerce.

A Turning Point for Cannabis Policy

The Second Circuit’s ruling marks a pivotal moment in the evolution of cannabis regulation. By striking down measures that favor local residents, the court has challenged states to develop more balanced social equity programs that comply with constitutional principles. This decision not only reshapes New York’s cannabis market but also signals a potential shift toward a more integrated national system for cannabis commerce.

Call to Action:
If you believe in fair access to economic opportunity and balanced cannabis laws, now is the time to speak up. Engage with local lawmakers, join advocacy groups, and stay updated on legal developments in the cannabis industry. Let’s work together to ensure that social equity and open commerce go hand in hand in shaping a just future.