Cannabis Musings - July 27, 2023
Is it unconstitutional to shut down unlicensed cannabis operators?
Friends – before we get started, we’ve got a schmear of new subscribers to these Cannabis Musings from my op-ed earlier this week in Jeremy Berke’s Cultivated. If you’re a new subscriber, welcome! Here’s a little bit about me. (If you’re already familiar with all of this, feel free to skip down.)
Hi there. I’m Marc Hauser of the eponymous Hauser Advisory, advising on cannabis industry strategy and engagement. I’ve been deeply involved in this industry for well over five years now, and started Hauser Advisory after 24 years of deal and capital markets law practice, including leading the cannabis team at Reed Smith LLP, a global law firm. My work includes macro strategy, problem solving, transaction navigation (e.g., M&A, investment, restructuring), and relationship building, and my engagements run the gamut from long-term transformative projects, to structuring and preparing for transactions, to board service. I’m also an Adjunct Professor at Northwestern University School of Law (my dual alma mater!), co-teaching Cannabis Law, Business & Policy.
Cannabis Musings is nearly five years old now, a weekly-ish, idiosyncratic perspective on cannabis industry policy, politics, and transactions filtered thru the lens of an ex-lawyer and Yiddish enthusiast.
Earlier this week, Forbes reported on the raid of Empire Cannabis Club, a New York City-based unlicensed cannabis operator. In July, agents from the New York State Department of Taxation and Finance shut down the operation. Co-founder Jonathan Elfand reportedly is going to fight the closure, claiming that he’s “operating legally under New York’s law.”
I have no opinion on the merits Elfand’s claim that it’s operating legally under New York law because it’s a private club that somehow doesn’t sell cannabis. Per the article, members pay a fee to enter, and “money exchanged for cannabis products is consideration not financial compensation.” And yet, I admit that I’m mesmerized by the sheer chutzpah of that approach.
There’s one particular thread in the article, however, that struck me as curious:
“The 14th Amendment is one of the biggest treasures that we have in the Constitution,” says Elfand.
His argument, which he explains with the conviction of someone without a law degree, relies on the amendment created after the Civil War that gives equal protection under the law to all Americans. Elfand believes it will help him prove that he can legally operate his business, state license or not. He says the government cannot charge him with marijuana-related crimes without taking down multibillion-dollar businesses like Curaleaf, Trulieve and Green Thumb Industries, all of which grow, distribute and sell cannabis legally in multiple states.
“How are you not charging Curaleaf?” he asks. “It is totally unconstitutional. Everyone has to be treated the same way.”
Even the author of the article seems to appreciate the fragile nature of this argument. I think it’s worth breaking down to perhaps illustrate a larger point.
Let’s say I want to start a knish food truck here in California, which requires various licenses under state and local law. But I don’t care about the law anymore (I’m an ex-lawyer, remember), so I just start selling potato and brisket knishes out of my minivan. The California Department of Health would quickly be interested in my unlicensed sales, and I’d also likely receive a visit from the California Department of Tax and Fee Administration for not obtaining a Seller’s Permit (which makes sure I’m collecting sales tax). Would they have the right to shut me down? Of course, because they’re state agencies enforcing state law. It wouldn’t be unfair that the state would be treating licensed knish trucks differently – those knish purveyors are not breaking state law.
The same argument goes with respect to how states treat state-licensed commercial cannabis operators relative to unlicensed operators (i.e., Empire Cannabis Club). New York State is treating unlicensed operators differently from state-licensed operators because they’re enforcing state law. Just like it’d be totally kosher for the state to shut down my unlicensed knish truck, but allow licensed knish trucks to continue selling noshes.
Now, perhaps Empire is arguing that New York State must enforce the Controlled Substances Act, a federal law, and shut all cannabis operations down, licensed and unlicensed. So, by shutting down Empire, but not licensed operators, New York State is presumably discriminating against unlicensed operators as a class in its inconsistent enforcement of federal law. The gist of a 14th Amendment equal protection claim is that a government agency can’t treat certain classes of citizens differently, with different classes receiving different levels of protection (e.g., state actions based on race and religion are given a much higher level of scrutiny by a court).
We’ve talked before about whether it’s worth it to sue the federal government about various cannabis laws (conclusion: probably not). These Cannabis Musings never provide legal advice, but it’s probably safe to say that Empire would not be a terribly sympathetic plaintiff in front of a federal judge making a 14th Amendment constitutional law claim.
First off, unlicensed cannabis operator is not a protected class under the constitution, so the state merely needs to show a “rational basis” for its actions, which is a really low barrier for a state to clear. Second, and more importantly, the Supreme Court has made it clear that the federal government doesn’t have the power to “require the States to govern in accordance with Congress’ instructions.” Third, imagine the argument in federal court: “Your honor, you should allow me to continue to break federal law and sell a Schedule I controlled substance because New York State letting others do it.”
There’s a lot of things to be frustrated about when it comes to cannabis policy, regulation, and enforcement in this country. Trying to turn things around by appealing to federal law and courts likely isn’t going to solve that.
Be seeing you!
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.