Dormant Commerce Clause Limits New York’s Cannabis Licensing – A New Second Circuit Decision

By: Andrew P. Cooper, Esq., LL.M. and Terran Cooper

In an August 12, 2025, opinion, the U.S. Court of Appeals for the Second Circuit vacated an order from the Northern District that had denied preliminary injunctive relief to two California-owned cannabis license applicants challenging New York’s adult-use cannabis licensing program. In a two-to-one decision, the panel (with a partial dissent by Chief Judge Livingston) held that the NY adult-use cannabis licensing scheme discriminated against out-of-state applicants in violation of the Dormant Commerce Clause by granting “extra priority” to applicants who had (or who’s relatives had) pre-2021 cannabis convictions in New York. Out of state or federal convictions did not qualify. This ruling may have a significant impact on the landscape for New York’s emerging adult-use cannabis industry, with some key limitations.

Background

The 2021 Marijuana Regulation & Taxation Act legalized adult-use (recreational) cannabis in New York and paved the way for an adult-use licensing scheme. An initial Conditional Adult-Use Retail Dispensary (CAURD) program was established, with the first dispensary licenses issued to applicants fulfilling certain justice-involved requirements (including a New York State cannabis conviction) and qualifying business experience requirements (or relevant non-profit requirements). While the CAURD program has faced legal battles as well, the subject opinion relates to the 2023 application windows not the initial CAURD program.

In 2023, the Office of Cannabis Management (OCM) announced the opening of applications for various adult-use licenses, including retail dispensaries. These applications would eventually be divided into a November 2023 queue, and a December 2023 queue, based upon date of submission and whether an applicant had submitted proof of site control. Applicants in either queue could improve their likelihood of securing a license by qualifying for “Extra Priority”, which required, among other items, a New York cannabis conviction.

Plaintiffs Variscite NY Four, LLC and Variscite NY Five, LLC (both majority-owned by California residents with California marijuana convictions) applied in the December pool, claimed Extra Priority, and sued when the state announced it would process the nearly 1,800 November-pool applications first.  The district court originally denied their motion for a preliminary injunction, reasoning that because marijuana remains federally illegal, the dormant Commerce Clause does not apply to the market.

Decision and Dormant Commerce Clause

Standing

The Second Circuit found that plaintiffs lacked standing to challenge CAURD licensing program as well as the internal ordering of the November queue. However, they did have standing to contest (1) New York’s decision to process the November pool ahead of the December pool, and (2) the “extra priority” criteria within the December pool.

Decision (December Queue)

The Second Circuit rejected the district court’s theory and held that federal illegality alone does not allow a state’s economic protectionism. Since Congress has not clearly permitted states to favor in-state actors, the ordinary Dormant Commerce Clause principles apply even to illicit markets.

The Second Circuit found that conditioning “extra priority” on New York State convictions functions as a proxy for in-state residency and thus discriminates against out-of-state applicants. While New York State offered restorative-justice objectives, the court found that the State had not evidenced that the existing discrimination was the only way to achieve those objectives. As a result, such facial discrimination is invalid since New York State did not show that there were no non-discriminatory means to achieve their goals.

Decision (November Queue)

Despite plaintiff’s allegation that the November queue’s expedited timeline effectively favored prior CAURD applicants (and thus, New Yorkers), the Second Circuit declined to enjoin the separate November queue. The Second Circuit did not dismiss the merit of these claims and instead pointed towards an insufficient record evidencing that the November queue had the purpose or effect of prioritizing New Yorkers (in order to grant injunctive relief).

Relief to Plaintiffs

The Second Circuit vacated the district court denial of a preliminary injunction and upon remand, the district court must reassess injunctive relief consistent with the Second Circuit opinion.

CAURD Program Impact

Despite the initial concern that this decision could topple the CAURD program altogether, a closer review of the decision should soften the blow. While the underlying decision itself would seem pertinent to the CAURD program, which required certain New York State convictions similarly to the “extra priority” criteria of the 2023 adult-use applications, the court found that Variscite lacked standing to challenge the CAURD licensing program. Resultingly, this decision does not address or directly impact the existing CAURD program.

What Does This Mean for the December Queue Applicants?

This case has potential ramifications for New York State operators and beyond. The Office of Cannabis Management (the “Office”) and Cannabis Control Board will likely be forced to suspend further processing under the “extra priority” criteria or articulate and implement a non-discriminatory alternative. Those applicants with “extra priority” statuses will likely be affected, and depending on how the Office proceeds, they may lose (or have diminished) their favorable queue positions.

This opinion may come as a double-edged sword for December queue applicants. While it may lead to the re-ordering of the December queue, potentially offering more favorable placement for non “extra priority” applicants, this further complicates the timeline for the review of the December queue applications. It is unclear how exactly the Office will proceed as of yet and it is possible that the Office re-orders the entire December queue. However the Office decides to proceed will significantly impact the eventual review of the December queue.

Conclusion and Broader Impacts

The court did not target the legislature’s broader mandate to advance social equity interests, meaning regulators may attempt to redesign the priority criteria based on race-neutral and residency-neutral factors to withstand scrutiny.

While the Dormant Commerce Clause has long been cited against state run cannabis programs, this opinion and the underlying extra-priority are unique in that they relate to a location-related conviction, not simply state residency. This decision signals that virtually any residency-tethered preference, even if framed as conviction-based (or similar locally involved requirements), invites challenge.

Regarding the underlying lawsuit itself, it will now be returned to the Northern District Court where plaintiffs will seek injunctive relief upon the licensing program. As identified in the Second Circuit opinion, injunctive relief will likely be limited to the December queue.

This case may be the most consequential dormant Commerce Clause decision in the cannabis space, or perhaps anywhere, since state-legal markets emerged. By rejecting New York’s conviction-based residency proxy, the Second Circuit reinforces that social-equity objectives, however compelling, must be pursued through non-discriminatory means unless Congress clearly dictates otherwise. Industry stakeholders should be prepared for a shake-up of the December queue (in addition to prior setbacks to this queue) and potentially further lawsuits. While no doubt significant, the true ramifications of this decision are yet to be seen and will likely be woven into the fabric of New York’s blossoming adult-use cannabis industry. The ruling reiterates the need for New York, and other jurisdictions, to craft innovative but legally and constitutionally sound pathways towards an equitable cannabis market.

If you have questions about how this decision may affect your cannabis business, contact FRB’s Cannabis & Psychedelics Practice Group at 212-203-3255 or fill out the form below.

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