Finch v. Treto

82 F.4th 572

Juan FINCH, Jr., and Mark Toigo, Plaintiffs-Appellants, v. Mario TRETO, Jr., Secretary of the Illinois Department of Financialand Professional Regulation, Defendant-Appellee.

No. 22-2050

United States Court of Appeals, Seventh Circuit

Argued September 15, 2022

Decided September 22, 2023

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 22 C 1508 — Rebecca R. Pallmeyer, Chief Judge.

Brian J. Armstrong, Attorney, Phillip A. Luetkehans, Attorney, Jessica Grace Nosalski, Attorney, Luetkehans, Brady, Garner & Armstrong, LLC, Itasca, IL, for Plaintiffs-Appellants.

Bridget DiBattista, Attorney, Richard S. Huszagh, Attorney, Office of the Attorney General, Civil Appeals Division, Chicago, IL, for Defendant-Appellee.

Before Sykes, Chief Judge, and Ripple and Kirsch, Circuit Judges.

Sykes, Chief Judge.

In June 2019 Illinois legalized the recreational use of cannabis by enacting the Cannabis Regulation and Tax Act (the "Cannabis Act" or "Act"). 2019 Ill. Legis. Serv. P.A. 101-0027. The Act established a licensing system for cannabis dispensaries administered by the Illinois Department of Financial and Professional Regulation. Applications for the first batch of licenses closed in January 2020, and by mid-2021 the Department had allocated 185 licenses pursuant to a review and lottery procedure. But the issuance of the licenses was stayed in connection with state-court litigation. The Department proposed a different set of rules for a second group of licenses in 2022.

The rules for the 2021 licenses established a point system that heavily favored applicants who were longtime residents of Illinois. The plaintiffs here—Juan Finch, Jr., and Mark Toigo—want to own or invest in cannabis dispensaries in Illinois, but neither of them lived in the state during the application period. Finch moved to Illinois in 2021 hoping to participate in the new market; Toigo did not relocate. Because neither was a longtime resident of Illinois, they thought it would be useless to apply for a license and did not do so. Instead, in March 2022 they filed this lawsuit raising a dormant Commerce Clause challenge to the residency provisions in the licensing regime. They also moved for a preliminary injunction halting the completion of the licensing process for the allocated 2021 licenses and enjoining the ongoing process for the 2022 licenses. The district court denied the motion, and the plaintiffs appealed. See 28 U.S.C. § 1292(a)(1).

We dismiss in part and affirm in part. The district judge's denial of the motion for a preliminary injunction cleared the way for the Department to issue the 2021 licenses, and it did so. That action largely moots this appeal. To the extent that some form of relief unwinding the licenses remains possible, the judge weighed the equities and held that the plaintiffs waited far too long to challenge the residency provisions. By March 2022 when they filed this suit, the 2021 licenses had already been allocated on a conditional basis. The judge reasoned that an injunction would severely harm the reliance interests of those who had been awarded the conditional licenses and otherwise disrupt the orderly completion of the first-round licensing process. We see no basis to disturb that sensible equitable judgment.

The judge also declined to enjoin the ongoing process for the second batch of licenses. At the time of her ruling, the Department had not yet finalized the regulatory criteria for this second group. The judge held that the challenge to the 2022 licensing regime was unripe because the Department might remove the residency provisions or otherwise materially modify the criteria. That too was a sound decision. The Department has since finalized the 2022 rules and deleted the provisions favoring Illinois residents.

I. Background

The district court's decision thoroughly explains the complicated regulatory background and the procedural history of this suit and the parallel state litigation. Finch v. Treto, 606 F. Supp. 3d 811, 816-24 (N.D. Ill. 2022). Only a summary is needed here. The Cannabis Act authorized the Department to issue up to 500 licenses to dispense recreational cannabis in Illinois. 410 ILL. COMP. STAT. 705/15-35.20(b). This case primarily concerns a preliminary form of the license that converts to a full license if the licensee satisfies certain conditions.

The Act authorized the Department to issue up to 75 licenses before May 1, 2020, and to allocate them across 17 distinct geographic regions of Illinois in proportion to each region's population. Id. § 705/15-25(a), (c). The application deadline was January 1, 2020, id. § 705/15-25(b), and applicants had to submit voluminous documentary support with their applications and pay a nonrefundable $5,000 application fee, id. § 705/15-25(d). The Department received 937 applications by the deadline.

The Act directed the Department to allocate the licenses through a competitive point-based system. Each applicant could receive a maximum of 252 points. Id. § 705/15-30(c)-(d). Points were awarded to recognize strength in an applicant's proposal and to promote certain social goals. This case concerns the points awarded for Illinois residency: for this first batch of licenses, extra points were awarded to applicants who could establish Illinois residency, or the residency of a 51% owner, "in each of the past 5 years." Id. § 705/15-30(c)(5), (c)(8); § 705/1-10.

The Department scored the applications and determined that the number of applicants with a perfect score of 252 points far exceeded the number of licenses available in each of the 17 geographic regions. To address this dilemma, the Department decided to allocate the licenses via a lottery conducted among those with a perfect score. Finch, 606 F. Supp. 3d at 820-21. Around the same time, several applicants challenged the accuracy of the scoring process in state court, and the Department announced that it would conduct a deficiency-notice process before holding the tie-breaker lottery. Id.

In July 2021 while the deficiency-notice process was proceeding, the Illinois legislature amended the Cannabis Act to codify the tie-breaker procedure for the original 75 licenses and to establish two additional lotteries for 55 licenses each, bringing the total number of 2021 licenses to 185. 410 ILL. COMP. STAT. 705/15-35, 705/15-35.10. All three lotteries were effectively limited to Illinois residents who had applied by the January 2020 deadline. The Department held the three lotteries in July and August 2021 and allocated all 185 licenses on a conditional basis in a final administrative decision on September 3, 2021.

Juan Finch and Mark Toigo both aspire to own a recreational cannabis dispensary in Illinois, but neither lived in the state at the time of the January 2020 application deadline for the first batch of licenses. Finch relocated to the state in December 2021 hoping to participate in the new Illinois cannabis market. Toigo remained a resident of Pennsylvania and from his home state has invested in cannabis-related businesses located in other states. Based on the residency provisions in the initial Illinois regulatory scheme, Finch and Toigo thought it would be futile to apply for a license and did not do so.

Instead, in March 2022 while the state litigation was still pending but well along the way toward resolution, Finch and Toigo filed this suit in federal court against Mario Treto, Jr., the Secretary of the Department, raising a challenge to the residency provisions under the dormant Commerce Clause. (They sued the Secretary in his official capacity, which amounts to a suit against the agency itself, Conners v. Wilkie, 984 F.3d 1255, 1260 (7th Cir. 2021), so for simplicity we refer to the Department as the defendant.) The plaintiffs also sought a preliminary injunction halting the completion of the 2021 licensing process as well as the ongoing 2022 licensing process. As we've noted, by the time they filed suit, the 2021 conditional licenses had already been allocated, but the Department had not yet issued them because the judge in the state-court case had issued a stay. The state judge lifted the stay in late May 2022, leaving the Department free to issue the 2021 licenses subject only to its commitment not to do so pending further order of the district court in this case. Finch, 606 F. Supp. 3d at 822.

The July 2021 amendments to the Cannabis Act had also directed the Department to issue at least 50 additional licenses on or before December 21, 2022. 410 ILL. COMP. STAT. 705/15-35.20(c). On March 25, 2022, just days after the plaintiffs filed the motion at issue here, the Department issued a proposed rule under which it would issue another 55 licenses in a lottery to be held sometime in 2022. See 46 Ill. Reg. 5127 (Mar. 25, 2022). The new rule contained slightly different residency provisions but continued to favor in-state applicants. Id. Under Illinois law the proposed rule would not become final until after a public-notice process and approval by the Joint Committee on Administrative Rules. 5 ILL. COMP. STAT. 100/5-6, 100/5-10.

In the meantime, the district judge addressed and denied the plaintiffs' motion for a preliminary injunction. Finch, 606 F. Supp. 3d at 844-45. In an exhaustive opinion, the judge concluded that the plaintiffs had established a likelihood of success on their claim that the residency provisions in the state's licensing regime could not survive constitutional scrutiny under the Supreme Court's dormant Commerce Clause jurisprudence. Id. at 830 (citing Pike v. Bruce Church, Inc., 397 U.S. 137, 142, 90 S.Ct. 844, 25 L.Ed.2d 174 (1970), and Regan v. City of Hammond, 934 F.3d 700, 703 (7th Cir. 2019)). She acknowledged, however, that the issue was murky and unsettled because federal law continues to prohibit cannabis distribution. Id. at 834-35. The judge also held that the plaintiffs had established, "at least in theory," that ...