OKLAHOMA CITY, Okla. – In a challenge to Oklahoma’s residency requirements for medical cannabis licenses, a Washington-based cannabis company has filed suit in Federal court against the state, arguing its laws discriminate against out-of-state operators and are in violation of the dormant Commerce Clause in the U.S. Constitution.
Original Investments LLC, doing business as Dank’s Wonder Emporium, has an intellectual property licensing agreement with an Oklahoma dispensary and is contesting both the residency requirement and ownership rules—out-of-state investors are limited to a 25 percent ownership stake. The law requires applicants to provide proof of residency for either two years preceding their application or five years over the past twenty-five years.
Original Investments is represented by attorneys John M. Hickey, J. Kevin Hayes, Amanda M. Lowe, and Larry G. Ball of Hall Estill Hardwick Gable Golden & Nelson PC, and Matthew Warner of Preti Flaherty Beliveau & Pachios Chtd. LLP. Hickey said he is confident in the plaintiff’s constitutional argument, but also realizes that a federal court has a dilemma with any cannabis-related case.
“The challenge and the quandary for governmental entities is arguing that the Commerce Clause doesn’t apply because the practice of growing, buying, and selling marijuana is illegal under federal law,” Hickey told mg.
“In some cases, that [25 percent] is disproportionate to the amount of the investment that out of state investors are making in the state of Oklahoma,” he added.
Original Investments’ complaint addresses both the residency requirement and the 25 percent ownership limitation:
1. This lawsuit seeks declaratory and injunctive relief from OKLA. STAT. TIT. 63 § 427.14(E)(7) (herein referred to as the “Residency Statute”), which unconstitutionally prohibits non-residents from receiving an Oklahoma medical marijuana business license and from owning more than 25 percent of any Oklahoma company that holds an Oklahoma medical marijuana business license.
2. The Residency Statue violates the dormant Commerce Clause of the United States Constitution by explicitly and purposefully favoring Oklahoma residents over nonresidents. See U.S. CONST. ART. I, § 8, cl. 3. The self-evident purpose of the Residency Statute is to discriminate against non-residents.
“Plaintiff desires to apply for an Oklahoma medical marijuana business license and/or be the majority owner of a company that has an Oklahoma medical marijuana business license, so that it can profit from Oklahoma’s lucrative medical marijuana market. However, the Residency Statute and its implementing rules prohibit Plaintiff from holding an Oklahoma medical marijuana license,” the complaint read.
The complaint also references a similar case in the liquor industry—Tennessee Wine and Spirits Retailers Association v. Thomas—that was settled by the U.S. Supreme Court last year. In the case, the court ruled Tennessee’s residency requirements for liquor store owners violated the Constitution’s Commerce Clause. Writing for the 7–2 majority, Justice Samuel Alito held that Tennessee’s law “blatantly favors the state’s residents and has little relationship to public health and safety.” Oklahoma Attorney General Mike Hunter recently opined Oklahoma’s residency requirement for liquor licenses could be ruled unconstitutional for the same reason, and Hickey noted, “not only do we have the Supreme Court opinion, but we also have Mike Hunter saying that if residency requirement were challenged, it may not withstand judicial scrutiny.”
When voters in the state of Oklahoma approved the Medical Marijuana Legalization Initiative (Oklahoma State Question 788 – SQ 788) on June 26, 2018, it established the lowest barriers to entry for a medical cannabis dispensary in any state in the U.S. As a result, there has been enormous interest from both Oklahomans and out-of-state investors. At the time, the Oklahoma State Department of Health (OSDH) crafted the state’s medical cannabis program regulations, and the Oklahoma Medical Marijuana Authority (OMMA) was established to administer them.
Initially, applicants needed only a residential lease agreement or a utility bill to qualify as a “resident.” However, on Aug. 29, 2019 a new bill, HB 2612 (the “unity bill”), took effect and established the more restrictive guidelines. In February 2020, Oklahoma Attorney General Hunter said “the durational residency requirement should not be applied retroactively to revoke licenses” issued before HB 2612 took effect. But licensees still needed to renew their licenses. House Majority Floor Leader Jon Echols attempted to change the residency requirement in HB 3228, but the bill was vetoed by Governor Kevin Stitt.
Since the unity bill was passed, the residency requirement has become a sticky and complicated issue for the state, which has encountered complaints from both existing and prospective cannabis companies. Omar Figueroa, a cannabis attorney based in Northern California, explained that a Federal court judge could make a judgement in the case, but might decide to pass.
“It seems like the question is a pure constitutional one, of whether the dormant commerce clause prohibits enforcement of a durational residency requirement, which is a straight up constitutional issue that judges will consider when there’s an actual case and controversy,” Figueroa told mg. “When there’s no actual controversy, then the federal courts will try to find any way to avoid it. So I think what’s going to happen in this case is if the plaintiff can survive the standing issue, they’ve got an excellent chance of prevailing.”
Oklahoma is not alone in limiting investments from out-of-state operators, and Oregon, California, and Colorado initially had residency requirements for cannabis license applicants, though the states have loosened these restrictions over time. In Maine, the state voluntarily dropped its four-year residency requirement after Wellness and Pain Management Connection LLC challenged the law, and the state’s attorney general decided it wouldn’t survive a court challenge. Attorney Matthew Warner, who now is part of the team representing Original Investments in Oklahoma, represented the plaintiff.
One of the other considerations in this case may be of a more political nature, said Figueroa. Because of the long-standing stigma associated with cannabis, politicians and judges sometimes want to avoid the subject altogether.
“It could be just a conservative judge who hates marijuana and doesn’t want to grant any relief to a marijuana plaintiff,” he said. “Then he could engage in an outcome-oriented decision and basically say, ‘I don’t even have jurisdiction, and I don’t want to touch it. I’m not going to help out the pot company.’ Of course, the judge won’t say that on the merits. The judge would do that procedurally.”