NY Judge’s Cannabis Ruling Opens Door for More Challenges

NY Judge’s Cannabis Ruling Opens Door for More Challenges

New York Judge's Ruling Sparks Potential Wave of Cannabis Regulation Challenges.

A New York judge’s recent ruling that a handful of the state’s adult-use cannabis regulations are “unconstitutionally vague” and infringe on the free-speech rights of cannabis businesses will likely spur more challenges, attorneys said.

New York Supreme Court Justice Kevin Bryant has done “the homework for every lawyer out there that has their eye on this space” and has standing to sue, Andrew Schriever, partner at Prince Lobel Tye LLP, said about the decision in Leafly Holdings Inc. v. NYS Office of Cannabis Mgmt.

Such lawsuits will likely be limited to specific sections of the rules, rather than the entire framework, attorneys said days after Bryant issued an amended opinion on the legality of the state’s recreational marijuana regime.

Bryant’s ruling focuses on five specific requirements, including rules that prohibit retail dispensaries from paying for marketing or promotion through a third-party platform that lists cannabis products for sale and a ban on fulfilling orders placed on a third-party marketplace where other retail dispensary licensees are listed.

Though Bryant narrowed his previous ruling to invalidate only the third-party marketing and pricing rules, rather than several other regulations that weren’t challenged in the lawsuit, the judge’s overall stance remained the same—that the state’s adult-use cannabis rules are arbitrary and capricious and there’s no “sound and substantial basis in the record” to support the actions taken by the New York Office of Cannabis Management.

Bryant’s presided over at least two other lawsuits challenging the state’s conditional adult-use dispensary licenses. This past August, he temporarily halted the cannabis dispensary licensing process in response to two separate but related lawsuits brought by a group of veterans and the Coalition for Access to Regulated & Safe Cannabis who said the state overstepped its constitutional authority by creating a new type of dispensary license and limiting eligibility. The challengers settled their cases.

“Whether you have a problem with any particular regulation, if that regulation was not seriously looked at, then this case becomes a precedent and tool by which somebody could challenge it,” Schriever said. “That’s assuming they have standing to challenge it—that part’s important. The sky really can’t fall because you have to actually be injured before you challenge the regulations.” Schriever represents Gracious Greens, an adult-use cannabis license applicant, which filed suit last month against the state’s proximity protection rules in the Albany County Supreme Court.

Anyone who wants to challenge New York’s regulations going forward is going to quote from Bryant’s decision, predicted Josh Bauchner, partner at Mandelbaum Barrett PC.

Those challenges will likely be limited to individual parts of the regulations, like the so-called “true party of interest” framework that places restrictions on who can own shares in a licensed cannabis business, or the “buffer zone” regulations that establish how close one dispensary can be to another dispensary, school, or church, said Cecilia Oyediran, chair of the New York State Bar Association’s Cannabis Law Section.

The likelihood of success is low for any lawsuit trying to throw out the regulations wholesale because the statute of limitations for challenging government actions has passed, added Oyediran, who’s also deputy director of Cornell’s Labor and Employment Law Program.

“I feel pretty confident we’re safe in that regard, but I do think we’ll see additional lawsuits, especially as the agency continues to make decisions that impact individual licensees or individual stakeholders or people who have an interest in the market in some respect,” Oyediran said. “I think we’ll see those come down the line.”

Investor Restrictions

The true party of interest framework is going to be a focus going forward because they limit how cannabis businesses get financing, Bauchner said.

Some people looking to set up cannabis businesses have to seek out financing from third parties who often operate in other states and want to get a foothold in New York, but the state says that if an applicant is invested in the supply-side, like cultivating or processing, in another state, they can’t be a true party of interest in an adult-use retail dispensary in New York. Conversely, if an applicant owns a retail license in another state, they are allowed to invest in or own a retail or supply business in New York.

It’s an area that’s potentially “ripe for litigation,” according to Oyediran.

“People have sent OCM tons and tons of comments about that area, and there really hasn’t been any sort of demonstration from OCM that they, in developing the regulations, took those into consideration,” Oyediran said.

Buffer Zones

New York’s process for approving dispensary locations is creating confusion and will be another area of litigation, according to Oyediran.

The state’s proximity protection rules, which establish a buffer zone around dispensaries, require a minimum of 1,000 feet to 2,000 feet between adult-use cannabis retail dispensaries, depending on the population of the municipality. It also requires dispensaries be at least 200 feet and 500 feet from churches and schools, respectively.

The issue, Oyediran said, is that the Office of Cannabis Management will sometimes put “a flag down” for one business that’s higher up in the review queue, which blocks off the area for other dispensaries.

“There have been cases where someone’s been on the map one day and off the next and someone else is there in their place,” Oyediran said. “I’ve been hearing a lot of complaints around that from folks and frustration.”

The buffer zone rule “has a lot of hair on it,” Bauchner said. “You have to be a certain distance from operators but until they’re operating they’re not an operator,” he added.

Going Forward

The pendulum has swung far enough into over-regulation in New York that it’s opened the door for potential cannabis business owners to make claims they’re being singled out or treated differently from those in other industries, like alcohol, simply because they’re in the cannabis space, Schriever said. That’s irrational, he added, but one could carve out an equal protection argument.

“As long as those variances exist, people can find a way to challenge those regulations,” he added. “Anytime that happens, we tell clients the court’s job is to find a way to save the regulations and help local government.”

Oyediran said she hopes the Office of Cannabis Management starts to think about outlining a clear hearing process that allows people to bring their complaints about rules and regulations directly to the agency so that they don’t have to keep going through the court system.

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