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New York cannabis regulators had just wrapped up the state’s inaugural general cannabis licensing application period on Dec. 18, when two plaintiffs filed another lawsuit asking a judge to pause approvals of all applicants.
While the plaintiff in the case has been previously successful in pausing cannabis licensing in New York via court injunction, several weed industry attorneys are nervous, but less alarmed about this lawsuit than previous court cases.
“Everybody’s been pretty sanguine about it, it’s almost like litigation fatigue,” said Hinman Straub attorney Matt Leonardo. “Looking at the complaint, there are some very valid points … but I feel like this is not existential in the way that other litigations have been.”
The plaintiffs in the case – Variscite NY Four, LLC, and Variscite NY Five, LLC – should sound familiar to legal cannabis stakeholders in New York. Variscite NY One, LLC, filed suit against the state in 2022, which resulted in a months-long partial injunction of the state’s Conditional Adult-Use Retail Dispensary program. The state settled that case in May.
In the new lawsuit – which was filed by California-based attorney Jeffrey Jensen and New York attorney Thomas Higgs, both of whom were involved in the initial case – plaintiffs make allegations similar to arguments they articulated in the previous suit.
However, some lawyers say claims plaintiffs make in the current lawsuit are no longer accurate, and that the totality of facts could make a judge unlikely to enjoin New York from awarding marijuana licenses.
Michigan-based Variscite NY One filed suit in the U.S. District Court for the Northern District of New York in September of 2022 after the state – according to the complaint – found it was ineligible for a CAURD license because the company is 51% owned by Kenneth Gay, an individual who has no significant connection to New York and who has a cannabis conviction in Michigan. Jensen owns the other 49%.
At the time, CAURD rules required applicants to have been convicted of a cannabis crime in New York and have a “significant presence” here. This violates the Dormant Commerce Clause, the lawsuit argued, because the clause prohibits states from passing legislation that discriminates against or excessively burdens interstate commerce.
A federal judge placed an injunction preventing regulators from issuing CAURD licenses in several areas of the state, but eventually narrowed it to only apply to the Finger Lakes region – where Variscite sought to open a store. As part of the settlement, New York’s Office of Cannabis Management agreed to grant the plaintiff a cannabis retail license. The agreement further stipulated neither the state nor Variscite would seek further damages or legal fees from each other.
On the final day of New York’s first-ever general application period for cannabis licenses, Variscite Four and Five – entities that are separate from Variscite One but owned by the same people – filed suit. Again, plaintiffs allege aspects of New York’s MRTA and state regulations violate the Dormant Commerce Clause.
The plaintiffs, who applied for general licenses, argue that the CAURD program violates New York’s MRTA, which requires the CCB to open the window for all adult-use retail dispensary applications “at the same time.” They also claim the MRTA contains residency requirements to seek “extra priority” status in violation of the Dormant Commerce Clause.
“Injunctive relief is necessary to prevent Defendants from proceeding with the application program, or enforcing the unconstitutional Regulations that favor New York residents over out-of-state residents,” plaintiffs argued in the recent complaint.
While these were compelling arguments in 2022, the facts on the ground have changed in such a way that plaintiffs’ claims are no longer accurate, said Jason Klimek, an attorney for law firm Barclay Damon, where he co-leads the cannabis team.
The suit seems pretty weak compared to a recent lawsuit, filed by Carmine Fiore and three more service-disabled veterans, which led to a near four-month injunction on the CAURD program. That injunction was lifted after parties reached a settlement on Dec. 1, 2023.
“When the [Fiore] lawsuit was first filed in August, and I read that, I was very concerned … I said, ‘They have a really good case,’” Klimek said. “When I read this lawsuit, I said, ‘They do not have a very good case.’”
Klimek, who has assisted dozens of clients applyling for CAURD and general licenses, said previous language on a mock application from the OCM did require CAURD applicants to have lived in a New York State community that was disproportionately impacted by cannabis enforcement (CDI), or who have a New York cannabis arrest.
However, that language has been updated, and exhibits that plaintiffs in the recent Variscite case have filed appear to be screenshots of the old language, Klimek said.
New language does not suggest any New York residency requirements, Klimek said. Further, he added, it appears that in new licensing guidelines OCM made a point to say that applicants from out of state can get extra priority status if they show they’re from an out-of-state CDI, or were arrested for cannabis outside of New York.
“OCM, it seems like, they very much learned from the first Variscite case, and went out of their way to say, ‘Look, you can have [an arrest] from anywhere.’”
Klimek knows this is true first-hand, he said. Regulators recently allowed an out-of-state client he represents to apply for a social equity license using data that demonstrates the community the applicant is from qualifies as a CDI.
“I think this does not have legs,” Klimek said. “It seems like they are grasping at straws to try to make this fit the facts of the first Variscite case, but it just doesn’t seem relevant here.”
Leonardo of Hinman Straub is a bit more nervous about the viability of plaintiffs’ arguments in the recent case, but said the totality of facts would likely dissuade a judge from issuing an injunction that would potentially disrupt thousands of stakeholders.
However, the fact that the same people are filing a lawsuit similar to one they recently settled – which granted them a license – and the way they’ve gone about filing the new suit will likely rub most judges the wrong way, Leonardo said.
“You file a suit the day the application closes, it feels like you’re trying to game the system, and judges don’t like that,” Leonardo said. “This is the same plaintiff going back to the same court for the same relief – courts don’t really like that.”
Considering that judges generally require a high burden of proof in order to grant the injunction plaintiffs are seeking, Leonardo thinks plaintiffs’ behavior could persuade a judge to deny one.
But just because there appear to be cracks in the new Variscite suit, it doesn’t mean it won’t result in another injunction, said Lauren Rudick, founder and managing principal of Rudick Law Group, a law firm that is heavily focused on cannabis issues.
Dormant Commerce Clause arguments have been successful for cannabis industry plaintiffs who have federal lawsuits in New York, Maine and other jurisdictions, Rudick said.
She added that there are factors that make this lawsuit less viable than the previous Variscite lawsuit – including that CAURD was the only retail licensing program available when plaintiffs filed the initial suit, whereas now general licenses are also available. However, New York courts litigating cannabis issues seem to have been antagonistic toward the industry, she said.
“I’m hopeful that New York judges will appreciate the nuances between this case and successful cases in other states, notwithstanding their apparent initial hostility toward the industry,” Rudick said.