Don’t count on federal courts to rule on cannabis lawsuits

New York state has approved more than 30 licenses to operate recreational cannabis stores this year.

But a good number of those new stores are tied up in litigation.

There are still no licensed adult-use retailers outside of Manhattan because of an ongoing suit filed by an out-of-state company claiming discrimination against operators based outside New York.

Based on recent case law, out-of-state companies looking to take advantage of New York’s new adult-use laws are unlikely to have much luck suing for protection under federal statute.

In Peridot Tree v. City of Sacramento, a federal court in California refused to hear a federal discrimination claim brought by a Michigan resident who was denied a retail marijuana permit in the state capital because he did not meet the municipality’s residency requirement.

Given that Congress declared marijuana distribution unlawful under the Controlled Substances Act, the court did not identify any federal interest in the case.

Citing Supreme Court authority, the court invoked an “extraordinary and narrow exception” – the federal abstention doctrine – to avoid injecting itself into a federally illegal enterprise.

The ruling, currently on appeal before the 9th Circuit, has enormous implications for any marijuana dispute that a party might bring to federal court.

Broader implications

Although some federal courts were willing to rule on cannabis-related disputes pre-Peridot Tree, federal courts in California and Washington state have begun to follow this court’s lead – even for breach of contract and tort-based claims.

For instance, a federal court granted a motion to “stay,” or suspend proceedings, in Wildflower Brands v. Camacho – where an out-of-state resident brought a breach-of-contract suit in federal court seeking to recover millions of dollars from a failed marijuana-related business transaction – pending a decision in the Peridot Tree appeal.

In another action, Stirling Hort v. Industrial Ventilation, a federal court similarly chose to abstain from ruling where an out-of-state resident brought tort claims for the alleged contamination of their marijuana plants seized by the Washington State Liquor and Cannabis Board.

So, what does this mean for cannabis operators in New York and beyond?

Parties to a cannabis dispute – whether litigating private disputes or challenging licensing laws – should not rush back into federal court, which has made clear that marijuana cases are not welcome.

Peridot Tree was hardly the first case where a federal court refused to hear a cannabis-related dispute.

The Supreme Court itself held in 2001 that “federal district courts cannot employ their equitable powers if doing so would effectively revisit decisions Congress had already made when it passed the Controlled Substances Act.”

Since then, federal courts have consistently dismissed marijuana cases on the rationale that federal policy made clear there were no federal interests at stake.

Best alternative?

Cannabis growers, sellers and pretty much any player in the space should recognize that federal courts are simply not prepared to hear their cases.

Aggrieved parties are permitted – and encouraged – only to seek relief in state court until a time when the federal courts might award relief consistent with federal law (if and when that happens).

After all, the marijuana industry is a creature of state law.

Without regulatory or judicial interference at the federal level, states can continue to innovate policies according to their respective goals with the insight of local growers, sellers and community members.

We’ll keep an eye on the Peridot Tree appeal.

But, until then, cannabis businesses – in their operations, sales agreements and supply arrangements – should plan to take disputes to state courts, where judges are best equipped to address marijuana-related ventures.

Steven Hecht is a trial lawyer and original partner for New York-based law firm Rolnick Kramer Sadighi. He can be reached at shecht@rksllp.com.

Summer Associate Lilly Brown contributed to this column.

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