New York’s cannabis industry faced another setback recently after a federal appeals court ruled that the state unlawfully discriminated against applicants from outside New York in a recent licensing process.
On August 12, the U.S. Court of Appeals for the Second Circuit issued a 2-1 decision stating that the state’s choice to favor applicants with prior marijuana convictions under state law was unconstitutional. The case now heads back to a lower court for further action.
Although the ruling may not immediately disrupt the state’s program, experts believe it could discourage other states from designing cannabis licensing systems that prioritize residents or people with state-level convictions.
The lawsuit was filed in December 2023 by Beverly Hills attorney Jeffrey Jensen, who has repeatedly challenged New York’s cannabis regulations and similar laws in other states.
Jensen previously sued over the state’s Conditional Adult Use Recreational Dispensary (CAURD) program in 2022, winning a permit only to sell it later instead of opening a store. That case delayed the launch of New York’s legal market, which was projected at $1.5 billion.
In his latest case, Jensen argued that the state’s licensing rules violated the Constitution’s dormant commerce clause, which prevents states from giving preferential treatment to in-state residents. Regulators had offered advantages to applicants with cannabis convictions in New York, effectively sidelining those from other states.
Initially, a federal district judge sided with New York officials, agreeing with their argument that the commerce clause should not apply to cannabis since the drug remains illegal under federal law.
But the appeals court reversed that ruling, stating that the lower court had made an error. Judge Dennis Jacobs, writing for the majority, explained that states cannot create protectionist laws unless Congress explicitly allows it—and Congress has not done so for marijuana.
Despite the legal victory for Jensen, the impact in New York may be minimal in the short term. Regulators had already dropped their earlier plan to cap permits during the late 2023 application windows and instead began reviewing thousands of submissions. That review could stretch on for years, with officials even expressing concern that the state might be licensing more dispensaries than the market can support.
Attorneys watching the case note that the consequences could extend beyond New York. Courts across the country have been divided on how the dormant commerce clause applies to cannabis regulations, and other lawsuits brought by Jensen are still pending in the 9th and 4th Circuits. If those rulings contradict each other, legal experts say the issue may eventually land before the U.S. Supreme Court.
The broader marijuana industry, including firms like Aurora Cannabis Inc. (NASDAQ: ACB) (TSX: ACB), will be following these cases to see how any rulings delivered could impact the future of the industry.
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