In a pivotal ruling issued on August 12, 2025, the United States Court of Appeals for the Second Circuit vacated a lower court decision and held that portions of New York’s cannabis licensing framework violate the Dormant Commerce Clause (“DCC”) of the United States Constitution. The case, Variscite NY Four, LLC v. New York State Cannabis Control Board, presents yet another significant constitutional challenge to how states implement social equity programs within their legal cannabis industries. The decision is expected to influence state cannabis regulatory schemes and markets across the country.
The dispute involved two closely affiliated entities, Variscite NY Four, LLC and Variscite NY Five, LLC. Both companies are majority-owned by a California resident who has a prior marijuana-related conviction under California law. In December 2023, these companies submitted applications for adult-use retail dispensary licenses during New York’s general licensing round, which followed the earlier Conditional Adult-Use Retail Dispensary program. New York used a tiered priority system to rank applicants for this round. Those who qualified for the top tier, known as “Extra Priority,” received earlier consideration in the licensing process.
To qualify for Extra Priority status, applicants were required to meet three specific criteria. First, the applicant had to reside in a New York community that was identified as disproportionately impacted by cannabis prohibition. Second, the applicant had to have an income that was less than 80% of the median income in the county where they resided. Third, the applicant had to have a marijuana-related conviction under New York law or be closely related to someone who did. Although the Variscite entities met the first two criteria, they were deemed ineligible for Extra Priority because the conviction of their owner occurred in California rather than New York. As a result, their applications were placed at the back of the review queue.
Variscite filed a legal challenge arguing that New York’s prioritization system discriminated against out-of-state applicants in violation of the DCC. They asserted that the requirement for a New York-specific conviction functioned as a proxy for in-state residency and effectively excluded otherwise qualified applicants from other states. This type of exclusion, they claimed, constituted impermissible economic protectionism.
Initially, the United States District Court for the Southern District of New York dismissed the case. The district court concluded that the plaintiffs lacked standing and that the DCC did not apply in this context because marijuana remains illegal under federal law. However, the Second Circuit disagreed. The appellate court reversed the lower court and found that Variscite had standing to bring the suit. The harm they alleged was concrete because the licensing rules placed them at a competitive disadvantage and denied them equal opportunity to participate in the market.
The Second Circuit then addressed the constitutional question at the heart of the case. The court held that the DCC applies to New York’s cannabis licensing regime, even though marijuana remains federally prohibited. The court explained that the DCC applies to any state-created economic market unless Congress expressly authorized states to restrict out-of-state participation. Since Congress has not clearly authorized such protectionism in the area of cannabis regulation, the constitutional prohibition on state-based discrimination remains fully enforceable.
The Circuit Court found that New York’s licensing framework discriminated on its face: byy conditioning priority status on a conviction under New York law, the system created a categorical exclusion for out-of-state individuals who had otherwise equivalent convictions elsewhere. This exclusion could not be justified by a compelling state interest unless it was narrowly tailored, and the Court determined that the requirement was not. The Court also noted that even though New York’s goals of promoting social equity and remedying past harms from cannabis prohibition are legitimate and commendable, those goals must be pursued within the bounds of constitutional law.
Importantly, the Court did not invalidate New York’s entire cannabis licensing framework. Instead, it vacated the lower court’s dismissal and sent the case back for further proceedings. The decision makes clear, however, that any portion of a state’s cannabis licensing system that favors in-state residents or those with in-state convictions to the detriment of out-of-state applicants may be unconstitutional.
The broader implications of this decision are significant. Many states that legalized cannabis for adult-use implemented social equity programs with residency requirements or preferences based on prior convictions under that state’s law. This ruling suggests that such provisions may be legally vulnerable. States must now reconsider whether their licensing criteria can withstand constitutional scrutiny. While efforts to support individuals and communities harmed by drug enforcement remain important, those efforts cannot come at the expense of interstate commerce protections.
For cannabis operators and investors, the decision signals that state markets must remain open to competition from outside the state unless Congress provides otherwise. For policymakers, it raises important questions about how to design equity-focused programs that are both effective and constitutional. Alternatives may include programs based on income, economic hardship, or prior cannabis-related arrests or convictions, regardless of where those convictions occurred. States also can provide support to disadvantaged applicants through grants, technical assistance, and other neutral means that do not depend on geographic origin.
The Second Circuit’s decision in Variscite v. New York State Cannabis Control Board marks a turning point in the legal treatment of state cannabis programs. By affirming that the DCC remains applicable even in markets for federally prohibited substances, the Court drew a bright line in favor of dormant commerce clause protections for out of state applicants. States cannot use their licensing authority to shield their markets from outside competition, even in the name of equity. This ruling is likely to shape litigation, regulation, and policy across the nation and across the cannabis industry for years to come.
As the cannabis legal landscape continues to evolve, all stakeholders must remain alert to the constitutional dimensions of market regulation. The path to a fair and inclusive cannabis industry must still comply with the foundational principles of the United States Constitution.
Mandelbaum Barrett PC’s Cannabis, Hemp & Psychedelics attorneys stand at the forefront of a dynamic and ever-evolving legal landscape. We possess a detailed understanding of laws associated with the production, sale, use, and regulation of a broad range of controlled substances — from cannabis and hemp to psychedelics.
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The information provided in this post is for general informational purposes only and does not constitute legal advice. While we strive to ensure the accuracy and timeliness of the content, laws and regulations frequently change, and the information may not reflect the most recent developments. If you require legal advice or assistance, please contact Joshua Bauchner or Natalie Diaz.