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Can a Municipality Discriminate Against Non-Residents for Cannabis Licensing?

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Cannabis Licensing

In the Michigan legal cannabis market, as with other states, municipalities hold the keys to kingdom with respect to licensing specific cannabis properties. What that means is that it is up to the municipality to determine who can be licensed to operate a cannabis facility or establishment within their borders. While it remains common for municipalities to give preferences to local ownership within the context of a points-based or merit-based system, at least one municipality has taken this a step further and gave local residents the first shot at obtaining a license. This has had the effect of shutting out non-local companies from local marijuana licensing.  

But is this legal? Well, this is a question without an easy answer. But what is clear is that an applicant to a municipality with an ordinance that shuts out non-local companies can challenge the ordinance on constitutional grounds, and depending on the specific circumstances, may have a legitimate shot of striking down such a requirement. 

The first way a municipal application could strike down a local residency requirement would be under the commerce clause. In a 2019 decision, the U.S. Supreme Court struck down a Tennessee law that imposed durational residency requirements on operators of retail liquor stores, holding that such a requirement discriminated against out-of-state economic interests in violation of the constitution’s Commerce Clause. Under precedent set by this decision, an out-of-state company would have a strong legal case to strike down a municipal marijuana ordinance that gave municipal cannabis licenses only to local residents as such a restriction would prevent out-of-state interests from engaging in business activities. 

While a municipality could attempt to rebut this by establishing a legitimate local purpose, mere protectionism—or giving opportunities only to residents so they can benefit and others cannot—is never considered a legitimate purpose. Of course, a municipality will likely try to claim some other legitimate governmental purpose, such as public health and safety, or that it is easier to hold local residents accountable compared to out of state residents. But such attenuated reasoning is unlikely to be upheld in court.

The question then becomes—what about Michigan companies that are not owned by local residents? In this situation, the commerce clause argument is not as strong, as the constitution only talks about inter-state commerce. Intra-state commerce challenges typically only come into play where a good or service could cross state lines, which marijuana cannot.

That brings us to the next argument—due process and equal protection. The Michigan and U.S. constitutions prevent governmental entities from depriving persons from property by an arbitrary exercise of governmental power. Similarly, both the Michigan and U.S. constitutions’ equal protection clauses prevent discrimination against a person based on a characteristic that does not justify different treatment.  Such a challenge would need to show that the policy is arbitrary and not related to a rational governmental purpose where, as here, there is no legally established suspect classification at issue.

Thus, a non-local resident could argue that there is no rational connection between the residency or domicile of an applicant and the legitimate policy concerns of a municipality—e.g. promote local economic growth, equitable development, or otherwise. Similar to the commerce clause argument, naked protectionism is not considered a legitimate policy concern, and claiming otherwise when it’s clear that was the intent is unlikely to hold up to scrutiny. However, it is possible that a municipality could claim a legitimate policy concern such as providing preference to those disproportionately impacted by the war on drugs. But this in turn begs the question—aren’t there also non-residents that have been disproportionately impacted as well?

Here in Michigan, Grand Rapids was able to avoid a commerce clause, due process and equal protection challenge even though its tiered lottery system made it nearly impossible for out of state residents to obtain a provisioning center license. As a cannabis business attorney who evaluated such a lawsuit in that city, it was my opinion that an out of state applicant could have struck down Grand Rapid’s local preference provisions.  

Detroit’s proposed ordinance, which gives “legacy Detroiters” first shot at licenses, with there being a real possibility that there will be no more recreational retailer licenses left for non-Detroit residents after that application window is closed, is almost certainly going to be challenged. And if the challenge is brought by an out-of-state applicant under the commerce clause, there is a strong change that it would prevail. 

Looking to challenge a Michigan municipal cannabis ordinance? Give the cannabis business attorneys at Scott Roberts Law a call today!

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