First off, what is an injunction?
An injunction is an order from a Court that requires a person to do or not do something. They generally come in two flavors: preliminary and permanent. A “preliminary” injunction is used while a lawsuit is pending to preserve the status quo or to otherwise prevent something from happening that cannot be undone or remedied by some later award of monetary damages. A “permanent” injunction is generally issued at the conclusion of a case and continues in force and effect permanently or until vacated by some later order.
How is federal law at play in a state-run program?
Federal courts have limited jurisdiction. Generally, they can only hear cases involving questions of federal law, or cases involving controversies between parties from different states (and then only when the amount in dispute meets a certain threshold). In the Variscite case, the plaintiff is asserting a violation of rights arising under the United States Constitution—specifically the power of Congress to regulate interstate commerce—which is of course a matter of federal law. While the case could also have been heard in New York state court, there are a variety of reasons a litigant might prefer to be in federal court. For example, there are different procedural safeguards, the judges are appointed rather than elected (and thus less susceptible to the perception of political influence), and the courts tend to have more experience interpreting and applying federal law.
Can you tell me about the recent federal injunction impacting CAURD in NYS?
New York’s CAURD program generally requires for-profit applicants to be majority owned by a “justice-involved” person, defined in part as a person with a prior conviction under New York’s cannabis prohibitions, or someone with a spouse, guardian, or dependent who had a New York cannabis conviction. Additionally, guidance issued by the Office of Cannabis Management indicated that applicants must have a “significant presence” in New York State as established in a variety of potential ways.
Variscite N.Y. One, Inc. is a company incorporated in New York, but its majority owner is domiciled in Michigan and has no connection to New York. Variscite argues that New York’s “justice-involved” and “significant presence” requirements violate a constitutional principle often called the Dormant Commerce Clause. The Constitution gives Congress the power to regulate commerce between the states in a provision called the Commerce Clause. For a long time, courts have drawn the negative inference that the Commerce Clause implicitly limits the ability of state governments to regulate interstate commerce. Therefore, courts have held, states cannot place an undue burden on interstate commerce by adopting laws that advantage in-state market participants to the disadvantage of out-of-state actors. Variscite claims that New York’s CAURD program unconstitutionally boxes it out of New York’s cannabis market.
Immediately after filing its lawsuit, Variscite asked the Court to issue a preliminary injunction that stops the processing and award of CAURD licenses until the constitutional question can be resolved. Since Variscite’s application stated a preference for five of the fourteen regions identified by OCM for the distribution of licenses, Variscite asked for an injunction limited to those five regions (Brooklyn, Central New York, Mid Hudson, Western New York, and Finger Lakes). The court agreed that Variscite probably has a point and is likely to win its case, and issued a preliminary injunction stopping the processing of applications and issuance of licenses in the five regions identified by Variscite. That injunction will remain until the case is resolved.
Who does the injunction impact?
The injunction directly impacts anyone who identified one of the five affected regions as a preferred location in their CAURD application. OCM had set aside a total of 63 licenses for those regions, out of the program’s total of 150 potential licenses. OCM has continued to process applications for those who specified other regions, but even those applicants are impacted because they might not be awarded a license in the location they preferred. In addition, other out-of-state applicants could bring additional litigation at any time, and try to shut down applications in the rest of the state.
Cultivators and processors are also impacted. OCM issued dozens of conditional adult-use cultivation and processing licenses over the past several months. Those licensees are already harvesting and manufacturing consumer products. They will need a place to sell those products, and they will potentially have at least 63 fewer outlets. With enough consumer demand, this may not be a real issue. But only time will tell. While producers with the proper know-how may be able to preserve their product while they wait, others may be forced to remediate their products and sell it at a substantial loss. The State has argued that some producers may be tempted to allow their product to slip into the illicit market.
Finally, this decision has a direct impact on consumers in the five affected regions. OCM has already begun issuing licenses in the unaffected regions, and at least claims that retail sales will begin by the end of this year. Consumers in the five affected regions will be forced to travel to take part in New York’s legal program, or continue to turn to other outlets such as the ‘sticker shops’ that have proliferated throughout the state.
How long before a resolution is reached?
There is no set calendar. The State can immediately appeal the injunction and request that the review be fast-tracked, but even that process could take months. Variscite’s claims could potentially require New York to revamp not only the CAURD requirements, but some of the requirements set forth in the underlying Cannabis Law legislation. So even after the case is concluded, licenses could still be delayed.
Do the applicants that are impacted have any recourse in the meantime?
The State is charged with defending its program and seeking to lift the injunction. Aside from intervening in the case themselves, which would probably not make anything go faster, applicants have little legal recourse.
Anything else you care to share on the topic?
New York is not the first state to face a challenge similar to the Variscite litigation, and its requirements were tailored to avoid this type of challenge. While the delay will have a potentially severe impact on those already invested in this industry, Variscite’s challenge can and will eventually be decided and remedied. Anyone doing business in this very newly regulated space should be ready for these types of hiccups, and plan to adapt while New York’s market matures over the long haul. As part of that plan, look to the history of other states’ programs and expect to face the same thing.
By Patrick J. Hines, Hodgson Russ LLP
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