A Michigan business owner has filed suit in Los Angeles, challenging residency requirements for the city’s Department of Cannabis Regulation (DCR) social equity licensing program. The suit was filed on November 30, only days before the DCR is scheduled to hold a lottery that will award retail cannabis licenses to qualified social equity applicants.

Variscite Inc. and owner Kenneth Gay also recently filed a similar suit against New York state and its Office of Cannabis Management (OCM). In that case, Variscite was able to obtain an injunction pending a decision, 10 days before the state’s first round of social equity licenses were scheduled to be issued on November 21. The injunction blocked social equity licenses from being issued in the Finger Lakes, Central New York, Western New York, mid-Hudson and Brooklyn—all areas that Variscite noted in the suit as possible locations for storefronts. 

Regarding the Los Angeles case, DCR posted a statement on December 7 that read:

“On November 30, 2022, a lawsuit was filed in federal district court challenging the City’s upcoming retail cannabis application lottery. The lawsuit is part of a nationwide trend of coordinated legal proceedings seeking to dismantle social equity programs like the City’s, and it may upend the City’s licensing processes and future lotteries.  A hearing is scheduled for December 7, 2022, on a Temporary Restraining Order (TRO) seeking to halt the Lottery scheduled for December 8, 2022. The City filed an opposition to the TRO on December 2, 2022, and is working to dismiss the lawsuit.”

“DCR is committed to ensuring we have a regulated and safe cannabis market that promotes socially equitable outcomes for all stakeholders. DCR looks forward to pleading its case in the courtroom and will provide further updates in the future,” the statement said further. 

When asked for comment, a DCR representative said that the department could not provide specific comment on pending litigation. 

Regarding the Los Angeles case, attorney Christian Kernkamp told DOPE Magazine, “The plaintiffs offered to settle this case at no cost to the City in a way that would have allowed the Lottery to proceed as scheduled and limited to Los Angeles applicants, but the City Council refused the plaintiffs’ offer.” 

Gay’s New York and Los Angeles applications had been rejected because, though he has a previous conviction on cannabis charges that would qualify under social equity rules, the conviction was in Michigan, not in the states where Variscite has applied. Both New York state and Los Angeles require that equity applicants must be residents of the state where they have a conviction and are applying for a license. 

Variscite’s complaint is based on a piece of constitutional interstate commerce legislation called the Dormant Commerce Clause. “The [Dormant Commerce Clause] prohibits states from enacting laws that place substantial burdens (discriminate) on interstate commerce,” attorney Griffin Thorne of law firm Harris-Bricken blogged in a post about the cases. “This means that when a state enacts a law that regulates interstate economic activity by favoring its own residents, as with Maine’s residency requirement, it must be ‘narrowly tailored.’”

Thorne’s reference to Maine involves NPG LLC et al v. Maine Department of Administrative and Financial Services et al, in which residency requirements for cannabis licensing were challenged. In August 2020, the case was dismissed after the state attorney general declined to defend the residency rule, which was then removed from licensing requirements. 

Mystery surrounds Variscite, Inc. and owner Gay. The company has no apparent background in the cannabis industry in Michigan, California or New York. 

In February 2022, Gay also filed suit against the City of Sacramento’s Cannabis Opportunity Reinvestment and Equity program. The plaintiff in that suit, Peridot Tree, Inc., is owned by Gay, and again asserts that residency rules are unconstitutional. On November 17, a federal judge abstained from a decision in the case, citing continued federal illegality of cannabis. Peridot Tree reportedly will appeal in the 9th Circuit. 

In September 2020, Kernkamp also represented plaintiffs including ARMLA One, Inc., ARMLA Two, Inc. and Gompers SocialEq, Inc. in a lawsuit against the City of Los Angeles, the DCR and former DCR Executive Director Cat Packer. 

That suit alleged that licensing rules had been changed to benefit only certain social equity applicants and that some applicants were awarded licenses despite deficiencies in their applications. Plaintiffs also claimed that their application was disqualified after their proposed storefront location was found to be within 700 feet of a school, though other approved licensees’ had locations in close proximity to schools. The suit was withdrawn in August 2021. 

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