Marijuana

Are States Crossing The Lines?

How the Dormant Commerce Clause is impacting the manufacture, sale, and marketing of hemp-derived products.

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For years now, an increasing number of states have been pushing the constitutional boundaries by imposing stringent regulatory requirements on nonresidents selling goods and services within their borders. These impositions on out-of-state conduct have permeated the hemp industry, which for the past three years has been forced to comply with a patchwork of state regulations for the manufacture, sale, and distribution of finished products infused with hemp cannabinoids.

At the core of this issue is a bedrock constitutional provision more commonly known as the “Dormant Commerce Clause” (DCC). The DCC prohibits states from enacting legislation that discriminates against or excessively burdens interstate commerce and regulates conduct occurring beyond their borders without some adequate localized justification. This doctrine results from the basic constitutional principal that the U.S. was formed as one economic union that forced states to surrender the power to impose tariffs and restrain interstate trade. In essence, the DCC is “the primary safeguard against state protectionism.” Tenn. Wine & Spirits Retailers Ass’n v. Thomas, 139 S. Ct. 2449, 2461 (2019).

Nevertheless, some states that authorize the manufacture, sale, and marketing of hemp-derived products have adopted regulations that impose requirements on the sale of out-of-state products that arguably regulate out-of-state conduct and excessively burden interstate commerce.

California is most certainly the most aggressive and daring of these states.

For example, in its recently enacted legislation (AB-45), which (finally) legalized the manufacture, distribution, sale, and marketing of finished products containing nonintoxicating hemp-derived extracts and cannabinoids, including cannabidiol (CBD), the Golden State plans on regulating nonresident manufacturers, processors, and companies selling these products within its borders by, in part, imposing a fee for any travel as well as a per diem the Department of Health will incur when conducting out-of-state inspections.

Another example pertains to California’s infamous Proposition 65, a unique regulation that requires any business selling products in the state to provide warnings to Californian consumers about significant exposures to chemicals that may cause cancer, birth defects or other reproductive harm with stiff penalties for failure to comply that can be as high as $2,500 per violation per day.

Though California does not forbid the sale of out-of-state cannabinoid-infused products, the Golden State imposes regulatory requirements that arguably excessively burden interstate commerce, and thus, likely run afoul of the DCC.

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Unless Congress expressly overrides the DCC, which is a default rule, and validates state regulations that would otherwise be unjustifiably burdensome on interstate commerce, states with audacious regulatory frameworks, such as California, run the risk of getting sued. (While beyond the scope of this article, it is worth mentioning that some states that have legalized the production of marijuana have been faced with a growing number of DCC-related lawsuits, particularly states that limit participation in social equity programs to state residents. For more information on this issue, I highly recommend reading Tommy Tobin and Andrew Kline’s article, “A Sleeping Giant: How the Dormant Commerce Clause Looms Over the Cannabis Marketplace,” which highlights the need for Congress to address DCC concerns and propose solutions as it contemplates cannabis legalization or descheduling.)

Moreover, and maybe more importantly, by imposing burdensome requirements on out-of-state cannabinoid companies, states like California are hindering economic development for an industry already plagued with regulatory uncertainties and inconsistencies. In a perfect world, the feds would establish a clear, uniform regulatory framework for the manufacture, sale and distribution of these products that states could then adopt, which, in turn, facilitate compliance, help legitimize a stigmatized industry, protect and educate consumers, and ultimately, boost the U.S. economy.

Nathalie Bougenies chairs Harris Bricken‘s hemp CBD practice group and focuses her practice on health and wellness, in addition to corporate transactions and regulatory compliance. For the past three years, Nathalie has helped clients navigate the complex regulatory landscape of hemp products intended for human consumption and advises domestic and international clients on the sale, distribution, marketing, labeling, and importation of these products. Nathalie frequently speaks on these issues and has made national media appearances, including on NPR’s “Marketplace.” She also authors a weekly column for “Above the Law” that features content on cannabis policy and regulation and is a regular contributor to her firm’s “Canna Law Blog.” For three consecutive years, Nathalie has been named Rising Star by Super Lawyers.

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