August 31, 2022

The Ban on Interstate Commerce

The United States Constitution’s Dormant Commerce Clause (DCC) essentially forbids states from enacting legislation that discriminates against goods or economic actors from another state. The DCC is supported by the economic theory, “free trade enlarges markets, allows more efficient production and specialization, and ensures consumers can access a wide array of products they value.”

However, it is well documented that due to continued federal illegality, the application of this constitutional rule dramatically impacts the ability for cannabis entrepreneurs to trade freely and for cannabis consumers to access a wide array of products they may value.

In this article, we will explore the ban on interstate commerce in the context of the cannabis industry, the application of the DCC to cannabis products, and the effects of the potential federal legalization of cannabis.

Key Players in the Cannabis Industry Have Disagreed About the DCC’s Application to Cannabis Products

In Tennessee Wine and Spirits Retailers Assn. v. Thomas, the Supreme Court held that it was a violation of the Commerce Clause to require a prospective retail liquor store operator to have resided within a certain state for at least two years prior to acquiring a liquor license. This imposition of trade barriers between states was in violation of the DCC. Applying the DCC to the trade of alcohol could have a significant impact on state cannabis markets, since the industries could be considered similar in some respects.

In the context of legal cannabis markets, many states have imposed residency requirements, just like the one at issue in Tennessee Wine and Spirits Retailers Assn., on prospective cannabis company owners and/or investors. However, many legal cannabis advocates have sought to eliminate these requirements, arguing that their imposition is unconstitutional.

Some states have even preemptively eliminated their residency requirements in response to avoid a constitutional challenge. Specifically, cannabis regulators in Maine, Missouri, Oklahoma, and Washington, have faced constitutional challenges brought by cannabis companies against their respective states’ residency licensing requirements.

Specifically in Maine, the Attorney General agreed that the requirement “is subject to significant constitutional challenges and is not likely to withstand such challenges,” and thereafter, Maine dropped its residency requirement.  With the same legal reasoning as Maine’s AG, “a federal judge [also] enjoined the city of Portland, Maine, from applying its own residency preferences for adult-use cannabis licenses.”.

In comparison, a few key players in the cannabis industry have sought an exemption from the Dormant Commerce Clause, hoping that the U.S. Senate would allow states to “protect local marijuana licensees from out-of-state competition.” These instructive individuals argue that limiting the reach of the DCC is necessary to legalize cannabis federally. Robert A. Mikos wrote that “the restrictions legalization states now impose on interstate commerce in cannabis likely violate the Dormant Commerce Clause.”

The Ability to Conduct Cannabis Transactions Through Interstate Commerce Will Lead to Cannabis Industry Consolidation and a Shift in Production

The threat of future lawsuits like Tennessee Wine combined with the push for federal legalization suggest a major shift in the cannabis market if/when it becomes legal nationally.  Since states with legal marijuana markets already have regulatory structures, allowing for interstate trade of cannabis goods seems to be as simple as mirroring what the Alcohol and Tobacco Tax and Trade Bureau does for alcohol. A change in legislation will also necessitate a change in the regulatory scheme indicated above.  Looming around the corner with federal legalization is the significant issue: “what to do about existing state laws and regulatory structures necessary for the orderly business of intra-state cannabis markets.”

Robert A. Mikos, one of the country’s leading experts on drug law, predicts upon federal legalization, the national cannabis market may look like the beer industry in that there will be a handful of major cultivators rather than the thousands of cultivators that are now processing cannabis for local consumers. This predicted consolidation may introduce lower prices, which is always appealing to consumers.

However, there is data that shows that consolidation will threaten and eventually force hundreds of small cannabis business owners out of the market. Furthermore, entering the cannabis market is already a strenuous process, and consolidation will only further frustrate the process, since business owners will certainly need much more capital to compete in the national market.

The First Circuit Ruled the Constitution’s DCC Applies to the Cannabis Industry

Since the First Circuit’s ruling, there has not been a clear opening for interstate cannabis commerce; rather, the ruling marks more of a symbolic milestone as it was “the first time that a federal appellate court has placed clear limits on a state’s authority to restrict whether out-of-state players can invest in a regulated cannabis entity.”

The First Circuit will likely inspire other state regulatory agencies to reevaluate their licensing schemes.

Additionally, this ruling has significantly impacted the validity of claims brought against residency requirements under the DCC. Now, multistate operators “have precedent to challenge these [residency] requirements for both medical and adult-use cannabis.”

Most notably, “[t]he appellate court found that although Congress never decriminalized cannabis, it had acknowledged the existence of regulated medical marijuana marketplaces when it enacted legislation barring federal prosecutors from targeting those businesses.” Therefore, the First Circuit has fast-tracked the shift away from independent state cannabis markets and toward a national cannabis market.

The ban on interstate commerce has limited the amount of competition present in the cannabis industry, allowing for small cannabis businesses to succeed without worrying about the larger businesses in other states. However, if/when the federal government legalizes or de-schedules marijuana, the ability for small businesses to succeed could be severely limited and the Dormant Commerce Clause could further limit entrepreneurs’ desire to enter the cannabis industry.

At Manzuri Law, we are keeping a close eye on how the DCC impacts the state of California and the rest of the country’s cannabis industries. Stay tuned!