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In a jaw-dropping decision, an Albany County Supreme Court judge has invalidated all New York State regulations for adult-use cannabis, ruling that the rules are arbitrary and capricious, and therefore unconstitutional.
The Office of Cannabis Management spent about two years deliberating and writing the hundreds of pages of regulations, and the judge’s ruling on Wednesday dealt a serious blow to the agency’s already troubled industry rollout. It also raises serious questions about the competence and efficacy of New York’s OCM and Cannabis Control Board.
“This is unprecedented,” said Jeff Schultz, a partner at Foley Hoag who advises cannabis industry operators. “Pretty much most of the rules have been struck down, but that does not mean that this is the end story by any stretch.”
Judge Kevin Bryant’s ruling came from a lawsuit filed by cannabis-focused tech company Leafly Holdings, adult-use retailer Stage One Dispensary and a customer who uses Leafly to make informed decisions about her cannabis purchases.
The plaintiffs sued over specific rules that banned third-party marketing for weed companies, but Bryant’s decision invalidates OCM cannabis regulations parts 118-121, 123-125 and 131.
Collectively, these sections encompass all regulations for New York’s adult-use market.
In his decision, Bryant said that regulators essentially wrote and approved stringent regulations without demonstrating any factual basis.
Osbert Orduña, CEO of The Cannabis Place dispensary in Queens, criticized Bryant as an “activist judge,” and pointed out that the destabilizing decision came from a lawsuit brought by a large out-of-state company. He also had questions to which there are no clear answers.
“Will our bank continue to bank with us?” Orduña asked. “Will we still have the ability to sell cannabis to our clients if this means that the licensing process … is not invalidated?”
Orduña also wondered how law enforcement will be able to take action against unlicensed stores if the license application process is no longer valid – meaning it’s possible that unlicensed operators are no longer any more or less legitimate than licensed shops.
Schultz said the OCM will most likely appeal the ruling, and that Bryant’s decision would most likely be stayed until the appeal is litigated. He said he thinks an appellate court will likely narrow the decision to invalidate only the sections of OCM’s regulations that plaintiffs in the case challenged.
However, Schultz said, all of OCM’s regulations could still be in danger of judicial invalidation, since others will likely file lawsuits to challenge other rules.
“They’re on shaky ground to the extent that it’s now become clear that at least one court in New York State believes that all of the regulations could be unconstitutional,” Schultz said. “It does open up the possibility for other issues related to the regulations.”
Leafly’s lawsuit, which was filed in mid-September, argued that the OCM’s regulations surrounding non-plant-touching third-party platforms would essentially bar Leafly from doing business in New York.
In a court petition alleging the regulations are unlawful, Leafly cited several rules, including one that prohibits retail dispensaries from paying for “marketing or promotion through a third-party platform, marketplace, or aggregator that lists cannabis products for sale”; and one that prohibits licensees from contracting with a “person or entity performing any function or activity directly involving the licensed activities authorized for the license type.”
In his decision, Bryant noted that Leafly submitted comments outlining their concerns with these rules when the CCB and OCM were considering draft regulations, but regulators went ahead and approved them without addressing the problems Leafly identified.
Bryant also found deficient the evidence OCM attorneys presented defending the rules. OCM’s filings included an article from Yale Law Journal entitled, “Did Ticketmaster’s Market Dominance Fuel the Chaos for Swifties?” and an article from Mission and Local entitled, “Restaurants left on their own after SF nixed delivery fee cap.”
“Notably, there is no foundation in the record for any of these articles, nor is there any basis for this Court to pass on the accuracy of this information or the reasonableness of the conclusions set forth therein,” Bryant wrote.
The OCM did not submit any documents or transcripts showing how they developed the regulations regarding third-party marketing, Bryant wrote.
Additionally, the judge wrote, there is no indication any of the articles the OCM submitted as rationality for the regulations were ever brought before the CCB, or considered during deliberations.
“In point-of-fact, there is nothing in the record to establish precisely how OCM developed the regulations, which staff members participated in the process or how they addressed the litany of issues that were raised,” Bryant wrote.
Bryant called the regulations “impermissible restrictions on petitioners’ right to free speech,” and “unconstitutionally vague.”
It’s not the first time a court has expressed frustration with the OCM.
Bryant previously oversaw a lawsuit filed last summer, and notoriously issued an injunction that prevented regulators from approving most new dispensaries. During that case, Bryant repeatedly criticized regulators and their attorneys for sloppy rulemaking and inaccurate court filings.
Like Schultz, the Cannabis Association of New York on Thursday noted that Bryant’s decision in the Leafly case will likely be narrowed on appeal.
“It is likely that the judge may narrow his order to just the regulations governing third party platform, marketplace, or aggregators, or I would assume the OCM will appeal the decision and request an emergency stay on enforcement of the judge’s decision,” CANY President Damien Cornwell said in a statement.
However, Schultz said that even if this is the case, there’s still a very real possibility that judges could overrule all of OCM’s adult-use regulations root and branch.
“This will not be the last time OCM gets sued,” Schultz said. “There seems to be a lot of flaws that are exposed, and every week there seems to be another lawsuit against them … it’s not good for anyone.”