On August 12, 2025, the U.S. Court of Appeals for the Second Circuit ruled that New York’s adult-use cannabis licensing scheme, which gives “Extra Priority” to applicants (or certain relatives) with New York State marijuana convictions, is unconstitutional under the Dormant Commerce Clause. The case, Variscite NY Four, LLC v. New York State Cannabis Control Board, vacates the Northern District of New York’s denial of a preliminary injunction and remands for further proceedings.
“Congress has given New York no clear permission to enforce protectionist marijuana licensing laws; and that New York’s prioritization of applicants with convictions under New York law is a protectionist measure that cannot stand,” the court ruled.
While there is no immediate impact, the ruling could ultimately affect thousands of licenses under consideration in New York, as well as licensing around the country in states that have adopted similar licensing guidelines. It also could lead to a U.S. Supreme Court decision, as other courts, including federal courts in California and Washington, have either ruled the dormant commerce clause inapplicable to cannabis or expressed skepticism such licensing schemes are not unconstitutional.
Background
New York’s Marijuana Regulation & Taxation Act (often referred to as the “Cannabis Law”) and implementing regulations created a two-pool adult-use application process in late 2023. Applicants in both the November and December pools could receive “extra priority” – triple placement in the licensing review queue – if they:
- Lived in a community disproportionately impacted by prior cannabis enforcement,
- Had income below 80% of the county median, and
- Had a pre-March 31, 2021, conviction under New York marijuana laws (or a qualifying close relative with such a conviction).
The plaintiffs, majority-owned by California residents with California marijuana convictions, brought the lawsuit in December 2023, alleging this in-state conviction requirement effectively prioritized New Yorkers and discriminated against out-of-state applicants.
Court’s Key Holdings
- Dormant Commerce Clause Applies to Cannabis: The Second Circuit rejected New York’s argument that federal prohibition under the Controlled Substances Act (CSA) removes cannabis markets from Commerce Clause scrutiny. Congress has not “clearly authorized” state protectionist measures in marijuana licensing.
- In-State Conviction Requirement is Protectionist: Limiting “extra priority” to applicants with New York convictions serves as a proxy for favoring in-state residents and is discriminatory on its face. This preference is subject to strict scrutiny, which New York did not attempt to meet.
- November vs. December Pools: The court allowed a narrow challenge to the sequencing of November pool applications ahead of December’s but found insufficient evidence—at this stage—that the November pool’s property-control requirement was intentionally protectionist.
- Partial Standing and Ripeness: Plaintiffs had standing to challenge the December pool’s “extra priority” scheme and the November-before-December processing order, but not to challenge the earlier CAURD program.
The ruling is yet another blow to New York’s legal cannabis rollout, which has been plagued by lawsuits and other delays. Recently, the state clarified its interpretation of a law requiring dispensaries to be located 500 feet from schools, saying it had improperly measured the distance between the dispensary entrance and the school entrance, when it should have measured the difference from the school’s property line. This caused the state to inform more than 150 licensees and applicants their property was not viable under the Cannabis Law. The governor and legislators have since indicated that they intend to revise the law to permit the owners to remain in their properties.
Still, the industry is expanding with more than 400 dispensaries and $890 million in 2025 sales as of July.
Implications for New York and Beyond
If the ruling stands, New York will be barred from conditioning priority status on an in-state conviction, a change that could significantly reshape the state’s social equity framework. It also calls into question how the state will handle the nearly 5,000 pending applications, most for recreational dispensaries.
The decision also adds to the growing body of federal appellate precedent — aligning with the First Circuit — that state cannabis programs remain subject to Dormant Commerce Clause limits despite federal prohibition. As a result, other states with similar in-state residency or conviction requirements in their cannabis licensing schemes may need to revise their regulations to avoid constitutional challenges.
At the same time, conflicting rulings on the subject could set up a U.S. Supreme Court challenge. In addition to an earlier ruling by a federal court in Washington state, late last year, the Eastern District of California found the city of Sacramento’s similar licensing scheme was not subject to the dormant commerce clause.
Key Takeaways for Industry Participants
For out-of-state operators, this ruling strengthens the position of non-resident applicants seeking equal access to cannabis markets in New York and elsewhere. States pursuing social equity goals must design programs that do not overtly favor in-state residents or use indirect measures — such as in-state convictions — that have the same effect. Looking ahead, further legal challenges are likely to target cannabis licensing preferences that effectively exclude or disadvantage out-of-state applicants, signaling continued litigation risk in this area.
