Cannabusiness Advisory

The nascent cannabis industry is much like a younger sibling, riding the wake of its forerunner, alcohol.  In joining the vice industry’s consumer products market segment, the cannabis industry has had the benefit of being able to follow in the footsteps of the alcohol industry and anticipate potential upcoming obstacles.  This use of the alcohol industry as a guinea pig can be readily observed in connection with the evolving legal and regulatory frameworks currently being formulated for cannabis.  It is in this light that the June 26, 2019 U.S. Supreme Court decision in Tennessee Wine & Spirits Retailers Association v. Thomas, a case concerning certain Tennessee alcohol regulations, can offer some guidance and foreshadow the future of cannabis laws and regulations.

In Thomas, the Tennessee Wine and Spirits Retailers Association (a trade association of in-state Tennessee liquor stores), sought relief from the Supreme Court in their endeavor to have certain Tennessee state regulations -which required state residency for holders of alcohol licenses- upheld.  Justice Alito and the Court ruled against the Association in their holding that such regulations were unconstitutional.

Although a number of other regulations requiring that alcohol license holders and applicants in Tennessee be residents of the State were part of the original case, only one such regulation was appealed to, and decided by, the Supreme Court in Thomas.  The regulation in question required applicants for an initial alcohol license in Tennessee to have resided in the State for the prior two years.  The Court, in its finding that such regulation was unconstitutional, based its argument on the Dormant Commerce Clause, noting that the 21^st Amendment to the U.S. Constitution did not provide any exemption.  The Dormant Commerce Clause, a legal doctrine inferred from the U.S. Constitution’ Commerce Clause and established by the courts, essentially prohibits state governments from restricting interstate trade and discriminating against out-of-state commercial actors.  The Thomas decision concluded that the alcohol residency requirement for licensure in Tennessee did in fact restrict interstate trade, by discriminating against non-Tennessee residents, and was not narrowly tailored to advance a legitimate local purpose (a showing of which would have permitted such discrimination and thereby, the regulation).

Interpreting the decision of Thomas through the lens of the cannabis industry sheds some light on the future viability of state cannabis regulations that impose similar state residency requirements as prerequisites for obtaining cannabis licenses.  The timing of Thomas is particularly noteworthy, given the recent implementation of Missouri’s state-level cannabis regulations, which include residency requirements, and Colorado’s amendment of its existing regulations, scaling back the restrictions on out-of-state ownership of Colorado cannabis licenses.

On June 4, 2019, the State of Missouri adopted its first set of regulations to govern the medical marijuana industry in that state.  One such regulation requires that any corporate entity applying for medical marijuana licensure be at least majority owned by persons who have been residents of Missouri for at least one year.  Other states have similarly adopted their own in-state ownership requirements as part of their respective cannabis licensing regulations.  However, one such state, Colorado, recently reversed position, by passing a new law (HB19-1090) on May 29, 2019, which steps back many of the State’s previously implemented residency requirements.

Given the lack of case law pertaining to these new state cannabis laws and regulations, particularly at the federal level, the Thomas case and others arising from the alcohol industry are helpful in mapping out the prospects of their cannabis counterparts.  Many of the residency requirements found in the cannabis regulations of certain states, such as Missouri, have similarities to those in the alcohol industry, making Thomas of particular import and casting a large degree of doubt on the constitutionality of such regulations.  However, the current federal illegality of cannabis has had a chilling effect on litigation in the cannabis space, so any future use of Thomas to strike down the residency requirements of state cannabis regulations may not come for some time.  With this potential delay in litigation, there is a distinct possibility that many of the states in question may opt to take Colorado’s lead and follow suit in repealing the regulations on their own, in the pursuit of greater access to capital for their respective domestic cannabis industries.