The Dormant Commerce Clause and Marijuana: Does Congress Control Industries they Hold Out to be Illegal?

On October 19, 2022, Chicago-based pharmaceutical company, Green Thumb Industries announced a partnership with Arizona-Headquartered Circle K to create a first-of-its-kind gas station and convenience store that also sells recreational marijuana.  This plan will allow ten Circle K stores in Florida to sell marijuana products such as gummies, vapes, and raw cannabis through newly created “RISE Express” dispensaries that will be attached to Circle K store, but utilizing a separate entrance from the main store.  A spokesperson for Green Thumb stated, “To be clear, Circle K is not selling cannabis in its U.S. stores.”  But despite this distinction, the planned deal, which will launch officially in 2023, with plans to expand beyond the initial ten Circle K stores, will be a first for the growing marijuana business in the United States.

In Florida, Marijuana has been medically legal since early 2022, but has not been decriminalized.  According to Florida Statute § 381.986, “Medical Use of Marijuana,” those who have been diagnosed with a qualifying medical issue may receive a medical marijuana card from their doctor, which allows them to purchase marijuana for medicinal use from a licensed dispensary.

Florida is not the only state to legalize marijuana over the last two and a half decades.  In 1996, California became the first state to legalize medical cannabis with Proposition 215.  Since then, 39 states have legalized the use of marijuana in some form, with 19 states fully legalizing the substance.

However, Marijuana in all forms is still illegal on the federal level.  Despite bipartisan bills in both houses of Congress to pass a federal decriminalization bill, there has been little movement in the drive to reclassify the drug from a Schedule I substance under the Controlled Substances Act.

Because of this competing legality status between the Federal Government and numerous states, several large banks have been wary about accepting money from Cannabis distributors, regardless of the legality of their business in the states where they are located.  This has led to slower growth in the industry than was initially forecasted when states began to change their laws regarding marijuana at a faster pace.

But where to store their money is not the only looming concern for cannabis growers and sellers.  Interstate transportation of Marijuana is illegal under federal law, even if every state that the product moves through has legalized the substance.  Practically, this means that any agreement between growers/distributors and sellers, such as the agreement between Circle K and Green Thumb must be confined to a single state where Marijuana is legal.  In the agreement between these two companies, marijuana will only be sold at Florida convenience stores, and will be grown at a facility within the state.

This arrangement, where Florida-resident-companies alone can sell Florida-grown products within Florida seems to avoid the Federal government’s interference with this industry on its face.  However, according to at least one United States Federal Court, this is not the case.

On August 17, 2022, the United States Court of Appeals for the First Circuit issued a ruling in Northeast Patients Group v. United Cannabis Patients and Caregivers of Maine, in which they ruled that the United States Constitution prohibits states from adopting protectionist legislation affecting illegal interstate markets.  They based their ruling in the Dormant Commerce Clause of the Constitution, which is a restriction on the states’ power to pass legislation that discriminates against interstate commerce or unduly burdens the same.  This legal theory is based in the Supreme Court’s ruling in Gibbons v. Ogden, in which the Supreme Court ruled that legislation that granted monopolies to certain companies over the navigation of interstate waterways were invalid because the Commerce Clause of the Constitution designated power to Congress to regulate interstate commerce, and the broad definition of commerce included navigation.

In Northeast Patients Group, the 1st Circuit Court of Appeals was tasked with deciding a case in which a state law requiring medical marijuana dispensaries operating in Maine to be Maine residents.  A Delaware Company sought to purchase a dispensary in Maine, but was blocked by this state law in Maine, and sued for the right to make this purchase, arguing that the law violated the Dormant Commerce Clause.  The Court of Appeals agreed, stating that the Dormant Commerce Clause applies, regardless of the illicit nature of a particular interstate industry.

While the 1st Circuit’s ruling does not have any binding weight in the Sunshine State, it is not hard to imagine an out-of-state cannabis grower looking to Circle K and Green Thumb’s newly-inked deal and wanting to join in on the opportunity.  Under Federal Law, it would be illegal for a Florida company to import marijuana from another state, but under the Dormant Commerce Clause and the arguments accepted by the 1st Circuit Court of Appeals, it could be illegal for Florida to block this sort of transportation via legislation.

While Florida has not enacted a statute like the one in Maine that triggered the Court to issue their ruling inNortheast Patient Groups, it must, by Federal necessity, restrict the sales of Marijuana to products that were grown in the state.  This is the same issue that every state that allows the recreational or medical sale of cannabis must face, and one that until recently did not seem to present a problem to the burgeoning industry.  However, with the 1stCircuit’s ruling could present a new set of challenges to companies that wish to partner up with each other to expand the marketplace for Marijuana products.

In South Carolina, marijuana is still illegal for both medical and recreational use.  However, in December of 2020, Bill 3361:  “SC Compassionate Care Act” was filed in the South Carolina House of Representatives.  This proposed legislation would allow for health care providers in the State to prescribed cannabis or cannabis products for medicinal use in the Palmetto state by giving qualifying patients a prescription card to present at licensed marijuana dispensaries.  This bill also created a 6% tax on marijuana purchases, with the revenue from this tax being placed in the South Carolina Medical Cannabis Program Fund.

While this bill ultimately died in Committee, it was revived in February of 2022 when the Senate passed their own version of the “Compassionate Care Act,” that had the same effect as the House’s earlier version.  However, in May of 2022, the bill died in the House after an objection was raised that, according to the South Carolina Constitution, the bill should have originated in the House as it created a new tax.

To date, Marijuana in all its forms, for recreational or medicinal use, is still illegal in South Carolina.  But with the passage of a medical marijuana bill in the State Senate, the chances of this designation as an illegal substance changing seem to be raising.  It is likely that the State Legislature will take up another Medical Marijuana bill during the 2023 session, and should it pass both houses and be signed into law, South Carolina would become the 40th state to allow cannabis use within its borders.

As of now, Circle K and Green Thumb Industry’s deal is set to begin in 2023, with medical cannabis products being commercially available at gas stations throughout Florida as soon as January.  But, these companies, and others like them that may be seeing green when it comes to potentially partnering up, should at least put some thought into the Dormant Commerce Clause, and how courts will interpret this obscure area of commercial law.  For an industry as heavily-regulated, with as many conflicting legal standards as the Marijuana industry, this challenge may present the newest obstacle to growth.

About Andrew T. Smith
Special Counsel

Andrew T. Smith is an associate in the Retail & Hospitality practice group.