Excerpted from “Regulating Cannabis Interstate Commerce: Perspectives on How the Federal Government Should Respond,” Ohio State Legal Studies Research Paper No. 722, 2022.
As states have implemented adult-use cannabis markets, they have intentionally placed restrictions against any form of interstate trade within their regulatory frameworks. These restrictions generally support the aims of crony enterprises seeking to carve out regional monopolies but are patently unconstitutional. Some states have even gone so far as to impose residency requirements on all aspiring cannabis entrepreneurs, and even their passive investors, as a condition of licensure.
Courts have repeatedly made clear, however, that these state-imposed barriers to interstate commerce violate a body of law known as the Dormant Commerce Clause. The Dormant Commerce Clause was formed through a series of judicial interpretations of the U.S. Constitution’s Interstate Commerce Clause that generally prohibits states from imposing barriers to the free movement of goods, persons, and capital between the several states unless states have been granted express (and limited) authority to do so by Congress or if there is a legitimate public health concern that cannot be addressed through less restrictive means.
The economics of the Dormant Commerce Clause are tremendously beneficial for the nation as a whole because it promises a large national market for producers and encourages greater specialization reflective of the comparative advantages of persons or geographic areas. Indeed, it was the states’ imposition of trade barriers and their resulting inefficiencies that inspired the American founders to abandon the original form of American government guided by the Articles of Confederation. The Commerce Clause thus became a central focus of the nation’s new (and current) governing document.
The U.S. Supreme Court has recognized the primacy of the Commerce Clause throughout a long series of rulings. As recently as 2019, the court ruled in Tennessee Wine and Spirits that Tennessee could not require a person to have been a resident of Tennessee for at least two years as a condition of acquiring a license to open a liquor retailer. Several early states to enact adult-use cannabis markets, including Colorado, Maine, Oregon, and Washington, imposed nearly identical residency requirements to obtain a commercial cannabis license although several of the offending states have rescinded these requirements in the wake of the Tennessee Wine and Spirits ruling.
All states with regulated cannabis markets, however, prohibit the transfer of any cannabis inventory across state lines. State policymakers adopted these prohibitions largely in the belief that purely intrastate cannabis commerce would give the federal government no jurisdiction to prosecute licensed cannabis businesses or their regulators because the Commerce Clause only permits federal regulation of interstate transactions. This belief may be misguided.
In 2005, the U.S. Supreme Court relied on the Filburn interpretation of the Commerce Clause to assert, in Gonzales v. Raich, that federal prosecutorial authority extends to purely intrastate commerce. The Supreme Court had ruled in 1942 that federal agencies could fine Roscoe Filburn for evading New Deal-era price controls because he grew wheat and fed it to animals on his own farm. Even though Filburn’s actions neither constituted a commercial transaction nor crossed state lines, the court held that he had affected the supply and demand of wheat in the aggregate and therefore Congress could regulate his activity under the Commerce Clause. Although the Filburn decision has been widely derided, the court’s ruling in Gonzales makes it clear that federal authority extends to every cannabis transaction regulated at the state level.
A later policy adopted by the U.S. Justice Department in 2013 may have further cemented the belief among state policymakers that intrastate cannabis commerce could be shielded from federal prosecution. The Cole Memorandum, issued by Deputy Attorney General James Cole, advised federal prosecutors to focus their enforcement against federal cannabis crimes to those that implicate certain specified priorities. Among these priorities was “preventing the diversion of marijuana from states where it is legal under state law in some form to other states.”
It’s not clear whether this line implies that states with legal marijuana cannot permit shipments to any other state or whether it simply means shipments cannot occur to states where marijuana is not “legal under some form.”
In any case, the Cole Memo was never binding on federal prosecutors and was rescinded by the Sessions Memo in 2018 which directed prosecutors to apply the same standards toward cannabis as they have since 1980–at the height of the drug war.
This means there is no special opprobrium for purely intrastate cannabis commerce. As such, state-imposed bans against interstate commerce in cannabis are likely already unconstitutional, as Vanderbilt law professor Robert Mikos has opined. While the federal Controlled Substances Act authorizes criminal sanctions against all forms of cannabis commerce, states are not permitted to violate federal laws or constitutional principles simply because they are facilitating the violation of another.
In Tennessee Wine and Spirits, the plaintiff was a trade association of existing liquor retailers who sought to use the state’s licensing regime to bar a prospective new competitor from the marketplace. Similarly, some of the most prominent opponents to interstate commerce in cannabis are large corporate interests who have invested heavily to procure state-issued licenses and construct facilities. In states without advantageous climates for agriculture, these companies have built elaborate and costly indoor cultivation facilities designed to artificially mimic pristine outdoor growing conditions.
Robust interstate trade in cannabis would render many of these investments worthless overnight as lower-cost producers from California and Oregon displace high-cost goods in Illinois or New York. To maximize the value of these assets, entrenched licensees will seek to exclude as many competitors from the market as possible and lobby for regulations to accomplish that effect. These regulations make the cannabis industry less efficient and result in higher costs and fewer selections available to medical patients and adult-use consumers.
Some opponents to immediate interstate commerce claim that an open marketplace would threaten the viability of businesses granted licenses under social equity programs. These licensees were typically either direct victims of the drug war or come from communities disproportionately affected by the drug war and presumably have fewer resources with which to launch a business. States that limit the number of available licenses often reserve a select number of these licenses for social equity applicants. However, this opposition is unfounded. As Amber Littlejohn of the Minority Cannabis Business Association has argued, “The best thing you can do for social equity is open up the market.”
The well-heeled tend to dominate closed markets for the reasons described above.
Indeed, a thoughtful approach to federal legalization could create far more opportunities for social equity businesses through interstate commerce. The States Reform Act, for example, would expunge most federal convictions for cannabis and allow even the formerly incarcerated to apply for a federal cannabis license. It would further require the Small Business Administration to extend loans to cannabis businesses on the same basis as for other small businesses. The SBA offers business assistance programs specifically to “socially and economically disadvantaged individuals”—likely giving far greater protection to equity licensees than any state can offer within a closed market.
Congress should authorize a regulated system to facilitate interstate commerce such as that included within the States Reform Act. Even failing that eventuality, however, existing state regulatory agencies should begin working now to facilitate interstate commerce amongst the legal states.