Cannabis Musings - August 8, 2023
Cannabis Musings - August 8, 2023
On cannabis contract enforcement and interstate commerce challenges (warning: heavy law-talking content)
Friends – a federal court decision last week caught my attention for what it’s signaling. The federal District Court (a trial court) for the Western District of Michigan ruled that there are no constitutional property or liberty rights in a state-issued commercial cannabis license. (Thanks to Dai Truong’s very excellent Highly Objective newsletter for highlighting this, to which you should absolutely subscribe.) As was reported, the court rejected Viridis Laboratories’ 14th Amendment substantive due process claim against Michigan state regulators (a constitutional argument that the government has taken away liberty or property rights) because cannabis is illegal under federal law. The court didn’t even hesitate.
This is interesting for two reasons.
First, the Michigan district court’s decision that there’s no property right under federal law could be bad for the business of enforcing contracts. It’s been an ongoing concern for years that federal courts might not uphold cannabis agreements for policy reasons (i.e., it’s not good to enforce agreements to break the law). Although generally federal courts have thrown caution to the wind by entertaining these lawsuits, the threat has always loomed. This was recently highlighted by MedMen’s objectively hilarious argument last December that the real property lease they stopped paying rent on shouldn’t be enforced by a federal court because, well, cannabis is illegal. It was the kind of argument that makes a contracts professor squeal with delight.
To be clear, the court in Viridis wasn’t hearing a contract dispute. Nonetheless, it worries me a little (as formerly-practicing, yet still licensed, lawyer, although this isn’t legal advice) that it doesn’t seem too far a step from finding that there’s no substantive due process right relating to state-issued cannabis licenses, to finding that, for the same reason, there’s no right to enforce cannabis contracts in federal court.
Second, we’ve talked extensively over the years about the noodgey dormant commerce clause, which acts as the proverbial raspberry seed in the wisdom tooth of all of those state laws prohibiting the interstate movement of cannabis. To simplify, the court-created doctrine says that states can’t impose an undue burden on interstate commerce, such as blocking products from another state. It’s my favorite topic in the Cannabis Law, Business, and Policy class I co-teach at Northwestern Law because it’s arcane, confusing, and relevant.
The cannabis bar got all excited in mid-2022 when the United States Court of Appeals for the 1st Circuit (an appellate court) ruled that the dormant commerce clause does indeed apply to the cannabis market, which suggested that maybe all of the state laws blocking interstate cannabis movement are unconstitutional. The Michigan district court disagreed, noting in a footnote its distaste for that 1st Circuit decision, finding “persuasive the reasoning” of the dissenting judge on that opinion that the dormant commerce clause would apply “automatically or with equal vigor when the market in question is illegal as a matter of federal law." A federal District Court in Washington also rejected that 1st Circuit decision early this year.
This suggests to me that challenging state bans on interstate commerce will be more of an uphill climb than it would seem. The 1st Circuit decision could prove be an outlier - similar issues are at play within the 9th Circuit in Peridot Tree v. City of Sacramento and Jefferson Packing House. Although the arguments that state laws do indeed burden interstate commerce are sound, these recent cases seem to suggest that public policy takes precedence.
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Hauser Advisory provides advice and strategy on business lifecycle events and cannabis industry navigation, tapping into a deep, national network and twenty-five years of dealmaking and capital markets experience.
© 2023 Marc Hauser and Hauser Advisory. None of the foregoing is legal, investment, or any other sort of advice, and it may not be relied upon in any manner, shape, or form.