Leafly court decision could provide roadmap for challenging New York cannabis regulations

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For a brief moment last month, New York’s entire legal cannabis industry stood slack-jawed after a state Supreme Court judge appeared to dismantle its entire regulatory structure with a single ruling on a discrete civil suit.

Later, Judge Kevin Bryant walked back his original ruling in the lawsuit brought by cannabis-focused tech company Leafly Holdings and others against New York marijuana regulators, and issued a scaled back version that struck down a single section of the rules.

The corrected ruling elicited sighs – maybe even heaves – of relief. But some experts say Bryant’s erroneous first ruling could still play a role in future attempts to strike down hundreds of pages of regulations the Office of Cannabis Management and Cannabis Control Board spent years writing and approving.

“His findings of fact are really a roadmap to additional challenges,” Matt Leonardo, an attorney for Hinman Straub, said about Bryant’s original ruling. “I think there’s fertile ground to till.”

Bryant’s decision invalidated OCM regulations parts 118-121, 123-125 and 131, which collectively encompass all regulations for New York’s adult-use market. The corrected version struck down marketing and advertising regulations, ruling that cannabis regulators’ advertising standards are “arbitrary and capricious.” (The plaintiffs sued over specific rules that banned third-party marketing for weed companies.)

The judge’s reasons for doing away with the advertising and marketing regulations is largely the same as those cited for erasing other regulations in his original decision: that the OCM failed to prove they considered sufficient evidence when writing the rules.

In both rulings, Bryant said the court would be obliged to defer to regulators if their records demonstrated a rational basis for the rules they set; but OCM and CCB records didn’t meet the evidentiary standard necessary for such deference.

Bryant’s rulings rest on New York’s State Administrative Procedure Act, which says that in most cases courts must defer to state agency rulemaking decisions, as long as they’ve followed proper procedure, according to Leonardo.

The law sets a relatively low standard of proof for state agencies: rational basis. Basically, if a state agency can produce an administrative record that shows they engaged in the process outlined by SAPA, and had a rational basis for the rules they set, judges generally cannot overrule their regulations.

“To fail to meet that bar does not bode well for OCM for future challenges,” Leonardo said.

However, he added, future litigants will probably be unable to sue regulators on the same terms as plaintiffs in the Leafly case. That’s because plaintiffs in that case brought forth an Article 78 proceeding to challenge a state agency; but the statute of limitations for these cases – four months after a rule is published in the State Register – has already passed.

That doesn’t mean regulators are safe from being overturned via court challenges.

Fatima Afia, an attorney at Hiller P.C., said that even though plaintiffs likely lack standing to challenge the regulations themselves, they can sue based on how regulators enforce the rules. Some are doing that right now.

Gracious Greens, a prospective dispensary that is currently on the OCM’s licensing queue, filed suit against regulators in March, after regulators rejected their intended location because they approved another dispensary license applicant that is within 1,000 feet of the storefront.

Plaintiffs argue that the OCM is applying their rule preventing retailers from operating within 1,000 feet of each other in an arbitrary and capricious manner.

“Gracious Greens seeks declaratory and injunctive relief striking the regulation and/or prohibiting its enforcement so that the regulation’s invalid restrictions do not foreclose Gracious Greens’ dispensary plans from moving forward,” attorneys for the plaintiff wrote.

Afia said Bryant’s reasoning for striking down marketing regulations in the Leafly case will likely play a role in the Gracious Greens case, and future lawsuits.

“I’m sure that in those sorts of challenges, you’re going to see some reliance on the reasoning of Bryant in the Leafly decision to say … ‘as we’ve seen in other decisions, there’s a history here about how the OCM ultimately promulgates regulations,’” Afia said.

At the same time, Afia said she thinks fears that the Leafly case sets a precedent to tear down regulations root-and-branch are likely overblown. Bryant’s language could probably bolster a plaintiff’s argument, but they’d still need to establish they have standing to sue and provide evidence that regulators are enforcing rules in an arbitrary manner.

Leonardo also doesn’t think there’s a serious risk that lawsuits could dismantle the entirety of the OCM’s regulations, but that lawsuits could serve as a potent threat for people in New York’s cannabis industry who feel stymied by regulatory enforcement – especially elements like True Party of Interest restrictions.

“The office has interpreted the MRTA in a number of ways that I don’t know are consistent with the way the law is,” Leonardo said. “I wonder if some litigants are going to be looking at the margin between what the regulations say … and how the office interprets the statute and start pinpointing weaknesses there.”

“I could see litigants using openings like this as leverage over the office,” Leonardo said.