Introduction
On August 12, 2025, the United States Court of Appeals for the Second Circuit issued a decision in Variscite NY Four, LLC v. New York State Cannabis Control Board, Variscite NY Four, LLC v. N.Y. State Cannabis Control Bd., No. 24-384-cv, slip op. (2d Cir. Aug. 12, 2025) (“Variscite NY Four, LLC“) that is poised to reverberate through state cannabis regulatory regimes nationwide, especially as courts and policymakers continue grappling with how the dormant Commerce Clause applies to cannabis laws—an issue I analyzed at length in my April 2023 article for the Daily Journal.
Decision Summary: Variscite NY Four, LLC v. NY Cannabis Control Board
Background:
Variscite, majority-owned by California residents, challenged New York’s retail cannabis dispensary licensing scheme based on its “Extra Priority” rule. Variscite NY Four, LLC, slip op. at page 4. Under this rule, applicants with a marijuana-related conviction under New York law (prior to March 31, 2021), who also meet certain income and community-impact criteria, receive three chances in the license queue—effectively a substantial advantage over applicants with convictions under other states’ laws, such as California.
Holding:
- The Second Circuit found that New York’s prioritization of applicants with in-state convictions constituted economic protectionism, which is prohibited under dormant Commerce Clause principles unless Congress unmistakably authorizes such protectionism.
- Even though cannabis is federally prohibited under the Controlled Substances Act, federal criminalization alone does not give states carte blanche to discriminate against out-of-state actors.
- The court vacated the district court’s denial of a preliminary injunction and remanded for further proceedings, emphasizing that New York’s licensing preference for those with New York convictions “operates as a proxy for residency” and is unconstitutional absent clear congressional authorization to discriminate.
Dissent:
Chief Judge Livingston dissented, arguing that the dormant Commerce Clause should not constrain states in markets Congress intends to eradicate (such as marijuana), and thus New York should be free to favor its own residents in licensing—even if protectionist. Variscite NY Four, LLC, slip op. at page 47.
Significance for Challenges to Social Equity Laws
In my April 2023 Daily Journal article, I wrote that California’s cannabis social equity provisions—which often prioritize local residents with prior cannabis convictions—could be on a “collision course” with dormant Commerce Clause scrutiny. Federal courts and even the First Circuit had already shown a growing willingness to invalidate residency-based cannabis licensing requirements. At the same time, some courts had adopted the argument that the negative Commerce Clause simply does not apply to cannabis because Congress criminalizes the subject cannabis commerce.
The Variscite NY Four, LLC decision puts the Second Circuit firmly in the camp that disfavors state economic favoritism, holding that federal criminalization does not immunize state cannabis schemes from dormant Commerce Clause review. This aligns with the First Circuit’s Northeast Patients Group decision regarding Maine but diverges from district-level decisions in places like Oklahoma and Washington, setting up a potential circuit split as more appeals move forward.
- Direct Impact: The Second Circuit’s embrace of dormant Commerce Clause scrutiny in cannabis strengthens the legal argument against residency preferences—even those purportedly serving social equity and restorative justice aims.
- Ripple Effects: California, along with other states, faces heightened risk that local and state cannabis equity programs will be challenged and potentially overturned if they restrict eligibility based on residency, conviction location, or other proxies for in-state status.
- California’s social equity provisions, including SB 1326 and municipal ordinances, are now exposed. The Second Circuit panel’s rationale tracks arguments I raised in 2023: protectionist schemes, even for social equity, are likely unconstitutional absent a clear congressional OK. (Cf. On the Constitutionality of New York’s Marihuana Regulation and Taxation Act (NY Bus. Law Journal, July 9, 2024).)
- National Landscape:
The Second Circuit’s reasoning could influence other circuits (such as the Ninth, in Peridot Tree) and prompt uniform national standards for cannabis licensing, removing any residency-based favoritism and opening commercial cannabis markets to robust interstate competition.
What’s Next?
- Legal Battles Loom: The Second Circuit’s opinion adds momentum for plaintiffs challenging residency requirements across the country. If more circuits align with this view, Congress may be forced to address these issues directly or the Supreme Court may step into resolve circuit splits.
- Regulatory Consequences: States are now more likely to revisit cannabis equity and licensing schemes to ensure compliance, focusing on equity goals without erecting impermissible barriers to out-of-state participants.
Conclusion
Variscite NY Four, LLC, assuming an en banc panel adopts the majority’s position, looks like what could be a pivotal win for plaintiffs challenging state and local cannabis laws on dormant Commerce Clause grounds. As forecast in my 2023 article, the dormant Commerce Clause, now more than ever, stands as a front-and-center consideration for any state or local government seeking to advantage its residents in cannabis licensing—regardless of federal prohibition or local restorative justice motives. California policymakers and regulators would be wise to prioritize statutory revisions, anticipating scrutiny and reinvigorated legal challenges, and chart a path forward that serves both social equity and constitutional mandates.
