Variscite Ruling: Residency Requirements and the Future of Intrastate Cannabis Markets

By Charles Alovisetti

Sep 12, 2025

On August 12, 2025, the Second Circuit issued a landmark ruling in Variscite NY Four, LLC v. New York State Cannabis Control Board, striking down a high-profile feature of New York's cannabis licensing program.  

New York's "Extra Priority" system gave applicants (or their relatives) with marijuana convictions under New York law (but not out-of-state convictions) a significant advantage in the licensing process. The system functionally excluded out-of-state applicants because those convictions almost exclusively applied to New Yorkers. 

The district court upheld the program and reasoned that the Dormant Commerce Clause (DCC) did not apply to cannabis given its continued federal illegality. The Second Circuit disagreed. It held that Congress has never expressly authorized states to erect protectionist barriers in cannabis licensing. It reaffirmed the DCC's "bright-line" prohibition on economic protectionism, even in industries Congress has criminalized. On that basis, the Court struck down New York’s system as discriminatory and unconstitutional.

Other Court Rulings on the Dormant Commerce Clause and Cannabis  

The Second Circuit’s decision aligns with the First Circuit, which, in Northeast Patients Group v. Maine (August 17, 2022), struck down Maine's residency requirement for medical cannabis businesses. These appellate decisions create a growing precedent that state cannabis licensing regimes cannot discriminate against out-of-state applicants. 

At the district court level, however, results remain mixed. Courts in Maryland and California concluded that the DCC does not apply to cannabis because no lawful interstate market exists to protect. That reasoning is increasingly difficult to square with the appellate rulings in Maine and Variscite, which reject the notion that federal illegality creates a safe harbor for state protectionism. 

The split underscores a judiciary in transition. While some courts remain reluctant to extend constitutional scrutiny to federally prohibited industries, two federal appellate courts have now firmly placed cannabis under the DCC framework. The trajectory shows that courts now view protectionist rules, once considered essential to preserving local control, as legally vulnerable. Unless the Supreme Court intervenes or Congress acts to authorize residency-based preferences expressly, states should expect further challenges and a narrowing space for discriminatory licensing provisions. 

Fourth Circuit Case Highlights Limits of Social Equity Licensing 

The latest licensing round in Maryland reserved eligibility solely for social equity applicants. To qualify, 65% of ownership, with complete control, had to meet one of three prongs:  

1. Residence in a disproportionately impacted area  

2. Attendance at a Maryland public school (secondary education) with high rates of free or reduced-price lunches 

3. Attendance at specific Maryland universities with high Pell Grant rates.  

A California applicant, who had attended Cal State Long Beach, sued after regulators deemed the application ineligible. 

After the District Court refused to grant injunctive relief to the plaintiff, the Fourth Circuit, in Jensen v. Maryland Cannabis Administration (September 2, 2025), found that Maryland's approach was not discriminatory or protectionist. This outcome turned on one prong that did not explicitly require residency; nonresidents could be eligible by attending the designated schools, and the system also excluded Maryland residents who did not attend those schools. And because success on the merits was unlikely, the Fourth Circuit affirmed the lower Court's denial of injunctive relief. 

This case does not directly bear on broad DCC analysis because the Court in Jensen assumed the DCC applied to cannabis. However, industry participants should still pay close attention since it shows how state regulatory regimes must operate to survive constitutional scrutiny in a post-legalization world. 

In-State Cannabis Sourcing Rules Could Face Legal Challenges 

All state cannabis programs use sourcing rules to maintain closed, intrastate supply chains. Courts have consistently struck down blanket bans on out-of-state goods in alcohol and most other regulated products, making cannabis sourcing rules highly unusual. 

The reasoning in Variscite points toward vulnerability. The Court emphasized that federal illegality does not shield state cannabis markets from DCC scrutiny and that only Congress can authorize protectionist measures. Because the Controlled Substances Act criminalizes cannabis without granting states the authority to discriminate against out-of-state commerce, rules mandating in-state sourcing may not withstand challenge. Only one case has sought to test this theory, but the plaintiff withdrew it before the Court ruled. 

The consequences could be profound if and when such a case reaches the courts. Striking down intrastate sourcing requirements would not just tweak licensing programs; it would dismantle the fundamental architecture of the state-legal cannabis system. States built their markets on the assumption that cannabis must remain within their borders, both to comply with federal law and to preserve local regulatory control. A successful DCC challenge (which would have to occur in both the importing and exporting states) would collapse those walls, opening the door to interstate trade even without federal legalization. States might attempt to defend limited preferences for locally sourced goods on grounds other than residency (e.g., reserving some portion of shelf space for products produced by companies owned by graduates of local schools). 

Such a ruling could accelerate the arrival of a national market in cannabis, effectively forcing states to regulate an interstate industry before Congress has acted. This scenario would create enormous opportunities for well-capitalized multistate operators and producers in low-cost cultivation states, while simultaneously threatening the viability of small businesses and equity licensees that regulators granted a foothold only in protected intrastate markets. In short, a DCC challenge to the intrastate cannabis model could be the single most transformative and destabilizing development the industry has seen to date. 

What Alcohol Law Teaches About Cannabis and the Dormant Commerce Clause 

Alcohol law provides a helpful preview of how courts are likely to treat cannabis in a post-prohibition environment. In Granholm v. Heald (May 16, 2005), the Supreme Court struck down state laws allowing in-state wineries to ship directly to consumers while prohibiting identical shipments from out-of-state producers. More recently, in Tennessee Wine & Spirits Retailers Ass’n v. Thomas (June 26, 2019), the Court invalidated a two-year residency requirement for retail liquor licenses. In both decisions, the Court clarified that the Twenty-First Amendment does not authorize states to adopt protectionist measures that discriminate against out-of-state actors. 

The same logic is likely to apply to cannabis. Unless Congress expressly authorizes states to maintain protectionist barriers in any future legalization framework, the existing intrastate model (where production and sales remain legally confined within state borders) will not survive constitutional scrutiny in a federally legal cannabis market. 

Looking Ahead: What the Variscite Decision Means for Cannabis Licensing and Markets 

After the First Circuit's ruling in Northeast Patients Group, the Variscite decision confirms what many expected: state residency restrictions cannot withstand DCC scrutiny. The practical effect on the cannabis industry may be modest, since residency rules were always only one barrier among many. Legislators and regulators, however, should take the signal seriously. If they want social equity programs to endure, they must design those programs to withstand constitutional challenge without relying on protectionist measures. The Jensen case shows one possible path forward. The key will be to create some method of defending the preferred regulatory regime on grounds not wholly based on state residency. It's also not clear how other courts will address this issue. 

The larger and less openly discussed implication of Variscite concerns the future of state-bounded cannabis markets. The logic of the decision points toward the eventual dismantling of in-state sourcing requirements—the rules that have kept cannabis production and sales artificially siloed within state borders. Interstate commerce in cannabis seems inevitable and may even arrive before federal legalization. 

This outcome may prove less of a revolution than many expect. In practice, the broader cannabinoid marketplace (including intoxicating hemp products and illicit cannabis) already operates across state lines. The formal cannabis industry may not be far behind. 

If you have questions about how residency requirements, sourcing rules, or Dormant Commerce Clause challenges could impact your cannabis business, contact us today!