Maine Cannabis Residence Suits Raise Thorny Federal Issues

June 23, 2020

Author: Kara Thorvaldsen

Maine's adult-use cannabis industry is off to a bumpy start.

In 2016, voters in the state approved a ballot initiative to allow the regulation and sale of adult-use marijuana by a slim margin. However, nearly four years later, recreational sales have yet to begin. The process has been delayed in part due to opposition from the state's governor, who twice vetoed enabling legislation presented by the state legislature.

The Maine Office of Marijuana Policy, or OMP, a division of the Department of Administrative and Financial Services, or DAF, was finally able to promulgate regulations last spring, and as of this April had approved 16 conditional licenses.

However, just as the coronavirus pandemic hit the U.S. causing the OMP to delay the opening of the recreational market, two would-be adult-use applicants sued the OMP and its commissioner in federal court, contesting the statutory residency requirements.

Facing this challenge, the DAF announced it would not enforce the requirement, and was promptly sued by the United Cannabis Coalition of Maine and two individual adult-use license applicants in state court, seeking a declaration and injunction that the residency requirement must be enforced.

Hot on the heels of the state court action, a new federal lawsuit was brought against the city of Portland, challenging the residency preference in its permitting scheme.

How this may play out, and regardless of whether the controversy will be resolved through the legislature or in the courts, it will surely be closely watched by the cannabis industry locally and nationally.  

The Challenged State Residency Requirement
The Maine Marijuana Legalization Act as enacted by the Legislature sets forth the requirements for various types of marijuana licenses. As currently drafted, it mandates that any applicant for a marijuana license, other than a testing facility, must be a Maine resident.

In the case of an entity, "every officer, director, manager, and general partner of the business entity must be a natural person who is a resident," and a majority of the shares or ownership interests must be owned by residents or businesses owned by residents.1

As currently formulated, a "resident" is defined as a natural person who:

A. Has filed a resident individual income tax return in this state pursuant to Title 36, Part 8 in each of the four years prior to the year in which the person files an application for licensure under this chapter. This paragraph is repealed June 1, 2021;

B. Is domiciled in this state; and

C. Maintains a permanent place of abode in this state and spends in the aggregate more than 183 days of the taxable year in this state.2
As of June 2021, part A of this definition will be replaced with one that removes the four-year residency requirement; however, current residency requirements would still apply.

Notably, prior to the legal challenges being brought, the DAF was fairly explicit in explaining that Maine's licensing program was designed specifically to ensure that opportunities in the new industry would primarily be available to citizens of Maine. This residency requirement appears specifically tailored to that goal.

The Federal Challenge
On March 20, NPG LLC, doing business as Wellness Connection and Wellness and Pain Management Connection LLC filed a complaint for declaratory and injunctive relief against the DAF and its commissioner, seeking a determination that this residency requirement is unconstitutional.3

Wellness Connection, which conceded that it actually met the residency requirement as it is 51% owned by Maine residents and was able to apply for a license, nonetheless claimed it would be harmed by the requirement because it would have difficulty recruiting investors while staying compliant with the residency requirement.

Wellness Connection already owns four of the eight medical dispensaries in Maine. The co-plaintiff, Wellness and Pain Management Connection LLC, which allegedly does not meet the residency requirements, alleged that it was already a significant investor in medical dispensaries in Maine, but had not applied for any recreational licenses because to do so would be futile.

In their complaint, Wellness asserted that the residency requirement "explicitly discriminates against residents of other states, and are thus precisely the type of state laws that are prohibited by the dormant commerce clause of the U.S. Constitution."4 Citing U.S. Supreme Court precedent holding that a state law that discriminates against out-of-state economic interests is almost per se invalid, Wellness sought a preliminary injunction on enforcing the law.

In its arguments, Wellness relied heavily on the 2019 Supreme Court decision in Tennessee Wine & Spirits Retailers Association v. Thomas,5 which arose out of a challenge to a state residency requirement for liquor store licensees. After the Tennessee attorney general had advised the Tennessee Alcoholic Beverage Commission that the law was unconstitutional, the commission stopped enforcing the requirement.

After a state trade association threatened to file suit to prevent it from granting licenses to nonresident applicants, the executive director of the Tennessee Alcoholic Beverage Commission brought a declaratory judgment action, which was removed to federal court.

In a 7-2 decision, the court held that the state law violated the dormant commerce clause by discriminating against out-of-state actors for the purpose of protecting in-state interests.

Notably, the court rejected the argument that language of the 21st Amendment giving states the right to regulate alcohol did not trump the dormant commerce clause.

Shortly after the Wellness suit was filed, before the DAF filed a response to the complaint, the parties filed a stipulation of dismissal, stating in part,

The defendants have been advised by the attorney general that the Maine Marijuana Legalization Act's residency requirement ... is subject to significant constitutional challenge and is not likely to withstand such challenges. The attorney general thus does not intend to defend the residency requirements.

According to an announcement by the OMP, the agency will take steps to introduce amendments to the legislation to remove the requirement and amend its regulations in accordance with such amendments.

The State Court Action
On May 28, the United Cannabis Coalition of Maine, made up of Maine residents, and joined by the owner of a medical dispensary and an applicant for a recreational license, filed a state court action against the DAF and its commissioner Kirsten Figueroa, asserting that they would be adversely impacted by the OMP's agreement not to enforce the residency requirement, and that the OMP lacked the authority to enforce the laws on the books, notwithstanding the state attorney general's opinion on its constitutionality.6

These plaintiffs assert they have relied on the economic advantage provided by the residency requirement, including in how they formulated business plans and applied for licenses.

The DAF has not yet responded to the suit, and the complaint is silent as to what arguments the plaintiffs may make in support of the legality of the law. The Maine Coalition instead has asserted that in the absence of an order from a court of competent jurisdiction invalidating the law, the DAF had no authority to refuse to enforce it.

The Suit Against the City of Portland
Having succeeded in its challenge to the state law, on June 15, Wellness turned its sights on the city of Portland, which is expected to begin reviewing license applications in the near future.7 Portland's licensing scheme is points-based; Maine residents will be awarded more points than out-of-state actors, giving them a leg up in the application process. City representatives have indicated they intend to fight the suit.

Uncharted Territory
The challenges to the residency requirements and the decision not to enforce the law raise novel issues regarding separation of powers and federalism. It is unusual, but not unprecedented, for an attorney general to decline to enforce a law that he believes to be unconstitutional.

However, the bounds of when this is permissible are not well delineated. It is uncertain if the state court will ever reach the question of whether Maine's residency requirement can pass constitutional muster.

As to the interplay between the dormant commerce clause and state and city residency requirements for marijuana businesses, the question presented is a novel one. In any other type of business, a lawsuit to enforce a law that excludes out-of-state actors from an entire industry would be quixotic at best.

It is clear that such a measure would run afoul of the dormant commerce clause. However, if we step back and view the issue in context, the result looks less inevitable.

Wellness filed a lawsuit in federal court, asking a district court judge to hold that the residency requirements violated their constitutional rights to participate fully in commerce that has been held to be a criminal enterprise for purposes of the Racketeer Influenced and Corrupt Organizations Act by other federal courts.8 This was a bold move to say the least. It is not clear that a federal court can hold that the U.S. Constitution protects a person's right to participate in a criminal activity, or that it protects what arguably should be a purely intrastate commercial activity.

Federal courts have increasingly ruled on disputes arising out of the cannabis industry and judges have applied federal statutes to cannabis-related matters. One must nevertheless distinguish the difference between how federal agencies and the federal courts are responding to the growth of state commercial cannabis markets. Federal policy regarding enforcement of the Controlled Substances Act has shown ambivalence where the possession and distribution of marijuana is consistent with well-regulated state law.

Many federal courts, however, take a nuanced but strict position with respect to enforcement of cannabis-related contracts and other rights by evaluating whether enforcement would require the litigant to actively violate the CSA.

For example, various federal courts have enforced cannabis-related contracts pertaining to insurance, federal labor and employment statutes, federal intellectual property protections and contracts around ancillary products and services. In those cases, the courts determined that enforcement of the contract or right would not result in the litigant directly profiting off the possession, cultivation or distribution of marijuana. Some federal judges, however, have drawn a line where the court's decision would mandate violation of federal law.9

Federal judges have also been loath to employ federal law to provide benefits to marijuana businesses in certain other areas, most notably in the bankruptcy context.10

Wellness, anticipating the issue in its federal court filings, pointed out that despite continued prohibition, the federal government has allowed state-legal businesses to operate without prosecution, and has realized millions in tax revenue from these businesses. Unless and until cannabis is decriminalized on a federal level, these convoluted issues will continue to sow confusion in the industry for both government and private actors.

Even if the Maine Coalition succeeds in its effort to get the DAF to enforce the residency requirements, the constitutionality of that and similar laws will remain uncertain.

This article was originally published in the June 18, 2020, issue of Law360.

1 28-B M.R.S. § 202.
2 28-B M.R.S. § 102.
3 NPG, LLC d/b/a Wellness Connection, and Wellness and Pain Management Connection, LLC v. Department of Admin. And Financial Services, State of Maine, and Kristine Figueroa in her official capacity as Commissioner of the Department of Administrative and Financial Services, State of Maine, US District Court, District of Maine, 2:20-cv-00107-NT.
4 See U.S. Const. Art. I, § 8, Cl. 3.
5 Tenn. Wine & Spirits Retailers Ass'n v. Thomas, 139 S. Ct. 2449, 2453 (2019).
6 United Cannabis Patients and Caregivers of Maine, Dawson Julia and Christian J. Roney v. Maine Department of Administrative and Financial Services and Kristin Figueroa, in her capacity as Commissioner, Kennebec County Superior Court.
7 NPG, LLC d/b/a Wellness Connection, and High Street Capital Partners, LLC, Plaintiffs v. City of Portland, Maine, US District Court, District of Maine, 2:20-cv-00208-NT.
8 See, e.g., Safe Streets Alliance v. Hickenlooper, 859 F.3d 865 (10th Cir. 2017).
9 See, e.g., Bart Street III v. ACC Enterprises LLC et al., 2:17-cv-00083 (Dist. Ct. Nevada, April 1, 2020) (federal court refused to enforce loan contract to finance the expansion of the defendant's marijuana cultivation business by finding that right of first refusal and operating capital terms violated the CSA because the right of first refusal term would have allowed the plaintiff to profit from the sale of marijuana, and the operating capital provision provided direct assistance to the defendants' cultivation of marijuana).
10 See, e.g., In re: Way to Grow, Inc.  610 B.R. 338, 346 (D. Colo. 2019) ("it is frankly inconceivable that Congress could have ever intended that federal judicial officials could, in the course of adjudicating disputes under the Bankruptcy Code, approve a reorganization plan that relies on violations of federal criminal law.")

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