Federal court gives serial cannabis litigators reprieve in California

The Michigan man who has waged court wars over various cannabis social equity programs’ residency rules around the country has been handed a temporary victory in California.

The U.S. Court of Appeals for the Ninth Circuit on Monday reversed a lower court’s decision that had previously sidestepped a lawsuit by Peridot Tree Inc. – a company with majority ownership by Michigan resident Kenneth Gay – challenging Sacramento’s cannabis licensing program’s residency requirements.

The company argued against the city’s Cannabis Opportunity Reinvestment and Equity (CORE) program, claiming its stipulation that participants must be current or former Sacramento residents was unconstitutional under the dormant commerce clause of the U.S. Constitution.

The dormant commerce clause typically prohibits state legislation that discriminates against or excessively burdens interstate commerce. In this case, Peridot Tree contended that Sacramento’s residency requirements for cannabis licensing unfairly restricted out-of-state economic participants, thereby breaching federal law.

Previously, U.S. District Judge Kimberly J. Mueller had abstained from taking on the case, deferring instead to state court proceedings due to the federal illegality of marijuana and the perceived complexities involved. She cited various Supreme Court doctrines of abstention, which traditionally allow federal courts to refrain from deciding cases that touch on intricate state regulatory schemes or ambiguous state laws.

Other municipalities in the state, such as Los Angeles, joined Sacramento in urging the Ninth Circuit to uphold the abstention. Gay and a cohort of other serial litigators, including a Beverly Hills lawyer who appears to be behind efforts across the country, have seen mixed results in similar challenges in other states, including New York and Washington.

However, the appellate panel disagreed with the hands-off approach, stating that the residency requirements were not ambiguous and that the case did not meet the traditional criteria for federal abstention. According to the Ninth Circuit, even with potential ambiguities in state law, the core issue of the federal commerce clause claim remained unaffected and should be adjudicated in federal court.

The panel’s decision, penned by U.S. Circuit Judge Salvador Mendoza Jr., said that federal courts could not avoid cases simply because they involve complex interplays of state and federal law, particularly when constitutional claims are at stake.

“Given the clarity of the city’s residency requirement, precedent interpreting similar requirements, and the lack of state law issues that might narrow or moot the federal constitutional claim, Peridot Tree’s suit does not meet the requirements of Pullman abstention,” Mendoza wrote for the panel.

Gay’s attorney told Law360 that the “plaintiffs are happy the Ninth Circuit reached the proper decision and the district court’s stay will be lifted, so the case can proceed.”