A federal judge in New York has issued a temporary injunction barring the state from issuing licenses for cannabis retailers in five regions after a Michigan-based business filed a lawsuit challenging the process for awarding the highly coveted permits. U.S. District Court Judge Gary Sharpe issued the injunction on Thursday in response to a lawsuit filed by Variscite NY One Inc., a company that was denied a retail dispensary license by the New York Office of Cannabis Management (OCM).

In August, the OCM announced that the first Conditional Adult-Use Retail Dispensary (CAURD) licenses would be issued to companies headed by individuals with past convictions for marijuana-related crimes. Regulators are currently processing applications, with plans for the retail sales of adult-use cannabis to begin before the end of the year. Successful applicants will receive aid from a $200 million Social Equity Cannabis Investment Fund, which was created to help finance the leasing and outfitting of up to 150 recreational marijuana dispensaries across the state.

“We think that leaning into folks who are not only justice-involved, but have that business experience means that we’re going to find a bunch of applicants who have gone through some significant challenges to still open and operate successful businesses,” OCM executive director Chris Alexander told Politico when the policy was announced. “We just took a different approach.”

Dispensary Licenses Reserved For Those With Weed Convictions

To qualify for a cannabis retail license, applicants must be based in New York, as evidenced by a personal or corporate address included on the application. Additionally, a principal applicant or relative must have been convicted of a cannabis-related offense in New York. Those who were arrested but not convicted and those with federal or out-of-state convictions are not eligible.

Variscite is majority owned by Kenneth Gay, who was convicted of a marijuana offense in the state of Michigan. The application was rejected by the OCM, however, because Variscite “is [51%] owned by an individual who has cannabis conviction under Michigan law” and “has no significant connection to New York,” according to a report in local media.

The company filed suit challenging the retail cannabis license eligibility criteria, arguing that restricting the licenses to applicants with New York convictions discriminates against applicants from out of state and violates provisions of the U.S. Constitution that protect interstate commerce.

Ruling Affects Five New York Regions

In a ruling handed down on Thursday, the judge said that the state, represented by the attorney general’s office, had not convincingly argued how New York’s cannabis legalization law and regulations were narrowly tailored to serve a legitimate purpose. He noted that Variscite “has also demonstrated a clear likelihood of success on the merits.”

Sharp also issued a temporary injunction barring the OCM from issuing cannabis retail licenses in the Finger Lakes, central New York, western New York, the Mid Hudson, and Brooklyn regions of the state, which Variscite had listed on its application as preferred business locations. Approximately 63 of the anticipated 150 CAURD licenses were put on hold by the ruling. Licenses to be issued in 11 other regions, including the Bronx, Manhattan, Queens, Staten Island, and Long Island, were not affected by the injunction.

Although the injunction was limited to the five specified regions, David C. Holland, a partner at Prince Lobel and a member of the law firm’s business litigation and cannabis practice groups, said that the case could eventually affect a broader area of New York.

“This could have a wider impact across the entire state as the same state-specific contact and conviction requirements were imposed in 14 regions in New York, which are designated to set up a CAURD dispensary and may have prevented justice-involved individuals from other states from applying for a conditional license because of the state’s efforts to protect and promote its emerging cannabis industry,” Holland wrote in an email to High Times.

In a statement, OCM spokesman Freeman Klopott declined to comment on the case or Sharp’s injunction.

“We don’t comment on pending litigation. The Office of Cannabis Management is committed to the Marijuana Regulation and Taxation Act’s goals of including those impacted by the state’s enforcement of cannabis prohibition in the market that we are building and we are additionally committed to getting New York’s cannabis supply chain fully operational,” said Klopott. “The Cannabis Control Board will soon have before it applications for the Conditional Adult Use Retail Dispensary license which will start closing that supply chain.”

The spokesman also added that the OCM would still review the initial licenses recommended for approval at its next meeting on November 21. Christian Kernkamp, an attorney representing Variscite in the case, declined to comment on the temporary injunction when contacted via email by The New York Times.

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