Variscite NY One, Inc. v. New York

640 F.Supp.3d 232

VARISCITE NY ONE, INC., Plaintiff, v. State of NEW YORK et al., Defendants.

1:22-cv-1013 (GLS/DJS)

United States District Court, N.D. New York

Signed November 10, 2022

FOR THE PLAINTIFF: CHRISTIAN KERNKAMP, ESQ., Kernkamp Law, APC, 1801 Century Park East, 24th Floor, Los Angeles, CA 90067, THOMAS J. HIGGS, ESQ., E. Stewart Jones Hacker Murphy, LLP, 28 Second Street - Suite 203, Troy, NY 12180.

FOR THE DEFENDANTS: HON. LETITIA JAMES, New York State Attorney General, MATTHEW GALLAGHER, AMANDA K. KURYLUK, Assistant Attorneys General, The Capitol, Albany, NY 12224.

MEMORANDUM-DECISION AND ORDER

Gary L. Sharpe, Senior District Judge

I. Introduction

Plaintiff Variscite NY One, Inc. commenced this action on September 26, 2022 against the State of New York, the New York State Office of Cannabis Management (OCM), and the Executive Officer of OCM, Christopher Alexander, pursuant to 42 U.S.C. § 1983, alleging a violation of the dormant Commerce Clause. (Compl., Dkt. No. 1.) Now pending is Variscite's motion for a preliminary injunction, which seeks an order "restrain[ing defendants] from issuing any cannabis licenses under the [conditional adult-use retail dispensary (CAURD)] application program held from August 25 to September 26, 2022, for the following geographic areas: Finger Lakes; Central New York; Western New York; Mid-Hudson; and [Brooklyn]." (Dkt. No. 6 at 2; see Dkt. No. 21 at 4 n.2.¹) For the reasons that follow, Variscite's motion is granted.²

II. Background

A. Facts

On March 31, 2021, New York enacted the Marihuana Regulation & Taxation Act, with the short title of "Cannabis Law." N.Y. CANBS. § 1. Under the Cannabis Law, a person or entity may be an "applicant" for a cannabis license if that applicant has "a significant presence in New York state, either individually or by having a principal corporate location in the state; is incorporated or otherwise organized under the laws of this state; or a majority of the ownership are residents of this state." NY CANBS § 3. Additionally, pursuant to the Cannabis Law, OCM has the power "[t]o prescribe the form of applications for [cannabis] licenses and permits under" the Cannabis Law. N.Y. CANBS. § 11(4).

On August 3, 2022, OCM adopted part 116 of Chapter II of Subtitle B of Title 9 of the Official Compilation of Codes, Rules and Regulations of the State of New York (the "Cannabis Regulations"), which, in part, governs "CAURD licenses and the application process to acquire such licenses. 9 N.Y.C.R.R. § 116.1-.9.

Section 116.4(a) of the Cannabis Regulations, states:

The following minimum requirements must be met to become an eligible applicant for [a CAURD] license:

(1) an applicant must demonstrate:

(i) a significant presence in New York State, either individually or by having a principal corporate location in the state;

(ii) it is incorporated or otherwise organized under the laws of New York State; or

(iii) a majority of the ownership of the applicant are residents of New York State by being physically present in the state no less than 180 calendar days during the current year or 540 calendar days over the course of three years;

(2) if the applicant is an individual, or an entity with one or more individuals, at least one individual must:

(i) be justice involved, which means an individual that:

(a) was convicted of a marihuana-related offense in New York State prior to the thirty-first of March two thousand twenty-one;

(b) had a parent, legal guardian, child, spouse, or dependent who was convicted of a marihuana-related offense in New York State prior to the thirty-first of March two thousand twenty-one; or

(c) was a dependent of an individual who was convicted of a marihuana-related offense in New York State prior to the thirty-first of March two thousand twenty-one; and

(ii) provide evidence of the primary residence of the justice involved individual at the time of such individual's arrest or conviction; and

(iii) hold or have held, for a minimum of two years, at least ten percent ownership interest in, and control of, a qualifying business, which means a business that had net profit for at least two of the years the business was in operation; or

(3) if the applicant is a nonprofit organization, or wholly owned and controlled by one, the nonprofit organization must:

(i) be recognized as an entity pursuant to section 501(c)(3) of the Internal Revenue Code;

(ii) intentionally serve justice involved individuals and communities with historically high rates of arrest, conviction, incarceration or other indicators of law enforcement activity for marihuana-related offenses;

(iii) operate and manage a social enterprise that had at least two years of positive net assets or profit as evidenced in the organization's tax returns;

(iv) have a history of creating vocational opportunity for justice involved individuals;

(v) have justice involved individual(s) on its board or as officers; and

(vi) have at least five full time employees.

Additionally, § 116.4(b) provides the "[a]pplicant [o]wnership and [c]ontrol [m]inimums" required to acquire a CAURD license, demanding:

(1) At least 51% or more of the applicant shall be owned, in the aggregate, by:

(i) at least one individual that satisfies the requirements for an eligible applicant set forth in sections 116.4(a)(1) and 116.4(a)(2) or entity that satisfies the requirements for an eligible applicant set forth in sections 116.4(a)(1) and 116.4(a)(3) of this Part; and

(ii) any other additional individuals, if any, who are justice involved; and

(2) At least one individual that satisfies the requirements for an eligible applicant set forth in sections 116.4(a)(1) and 116.4(a)(2) or entity that satisfies the requirements for an eligible applicant set forth in sections 116.4(a)(1) and 116.4(a)(3) of this Part shall own at least 30% of the applicant and such individual or entity shall have sole control of the applicant or licensee.

Further, Section 116.4(c) outlines the CAURD application evaluation criteria, stating:

An eligible applicant shall be evaluated based on any of the following criteria which shall be weighted as determined by the Office:

(1) if the applicant is an individual, or an entity with one or more individuals, whether the justice involved individual was themselves convicted of a marihuana-related offense as set forth in section 116.4(a)(2)(i)(a) of this Part;

(2) the justice involved individual's primary residence at the time of such individual's arrest or conviction:

(i) relative to areas with historically high rates of arrest, conviction, or incarceration for marihuana-related offenses;

(ii) relative to areas with historically low median income; or

(iii) was provided by a public housing authority in New York State or New York City; and

(3) the qualifying business based on:

(i) the number of employees employed by the business;

(ii) the number of years the business has been in operation;

(iii) the profitability of the business;

(iv) type of business and whether the business was a retail business, or sold products or services directly to the end-consumer;

(v) whether the business had a physical location; or

(vi) whether the business received or resolved any violations, fines or fees assessed against the business by state or federal regulatory authorities; and (4) any other factors as determined by the Office.

Finally, Section 116.4(d) provides:

The office may create regional geographic zones for the scoring of [CAURD license] applicants. Applicants may be asked to rank a number of preferences of regional geographic zones to be considered for a license. For regional geographical zones where there are more applicants than available licenses, the Office may select from eligible applicants who indicated first preference for the given region based on weighted scoring of the evaluation criteria set out above. In the event there is a tie between two or more candidates or there are more applicants than available licenses after the evaluation criteria has been applied, the Office is authorized to use a random selection process to identify the final applicants to recommend to the Board for licensure.

OCM also published a document titled "Conditional Adult-Use Retail Dispensary (CAURD) Frequently Asked Questions," in which it explained, among other things, that "applicants are required to have a significant New York State presence or to otherwise satisfy the definition of applicant in the Cannabis Law and may be asked to submit documentation to prove such." (Dkt. No. 6, Attach. 19 at 8.) The document further elaborated: "acceptable documentation [to prove a significant New York presence] includes:" (1) "Proof of the individual with sole control's residency in New York State"; (2) "Checking, savings, retirement, or brokerage statements showing assets in New York State"; (3) "Tax filings showing assets, accounts, or property in New York State"; (4) "Deeds, titles, mortgage documents, or homeowner warranties showing property ownership in New York State," or; (5) "Any other proof of New York State presence as determined by the Office." (Id. at 8-9.)

Defendants invited applications for CAURD licenses through a "New York Business Express application website," and accepted applications from August 25, 2022 until September 26, 2022. (Compl. ¶ 22; see Dkt. No. 6, Attach. 9.) CAURD applicants were permitted to select up to five geographic regions of New York State for which their application would be considered, including: Brooklyn; Capital Region; Central New York; Finger Lakes; Long Island; Manhattan; Mid-Hudson; Mohawk Valley; North Country; Queens; Southern Tier; Staten Island; the Bronx; and Western New York. (Compl. ¶ 30; see Dkt. No. 6, Attach. 15.)

Variscite applied for a CAURD license; however, because it "is [fifty-one percent] owned by an individual who has a cannabis conviction under Michigan law" and "has no significant connection to New York,"³ Variscite is ineligible to be selected. (Compl. ¶ 31.) Variscite "satisfies all [other] requirements of...