A state agency that was sued two years ago for discriminating against out-of-state marijuana dispensaries argued in a federal appeals court Thursday that it has the right to discriminate because marijuana is still illegal under federal law.

Attorneys for the Maine Department of Administrative and Financial Affairs told a panel of judges that because Congress has yet to legalize marijuana, interstate commerce in cannabis products is illegal.

The department is appealing a 2021 U.S. District Court ruling that the state’s residency requirement for Maine dispensaries – which barred anyone who is not a Maine resident from becoming a licensed seller or owning a dispensary in the state – was unconstitutional because it violated federal laws that bar states from interfering with interstate commerce.

The case is the first of its kind to reach a federal appeals court and could have ramifications for other states in which medical and recreational marijuana are legal.

In 2020, one of Maine’s largest cannabis companies, Wellness Connection of Maine, sued to challenge the residency rule in both the medical and recreational markets.

Maine eliminated its residency requirement for recreational stores in 2020 but is appealing the district court ruling for medical dispensaries.

“In this case, Congress, through the Controlled Substances Act, has declared there is to be no market in marijuana,” said Maine Chief Deputy Attorney General Christopher Taub, representing the state Department of Administrative and Financial Affairs, during oral arguments in the 1st Circuit Court of Appeals.

The department is joined in its appeal by a group of small local sellers of marijuana for medical use called the Maine Cannabis Coalition. These sellers – legally called caregivers – are classified differently from dispensaries such as Wellness Connection because they operate on a much smaller scale. Caregivers pay less in licensing fees than dispensaries, which are allowed to operate with more space.

“The caregiver model is what we’re really protecting,” said Susan Meehan, a caregiver and chairperson for the coalition. Meehan said out-of-state dispensaries would “interfere with the opportunity of [Maine] citizens and mom-and-pop shops to participate in the market.”

Attorneys for Wellness Connection of Maine said Congress has not explicitly barred the interstate commerce of cannabis.

In its February response to the state’s appeal, the company wrote that “[n]othing in the Controlled Substances Act affirmatively grants states the power to discriminate against nonresidents.”

Wellness Connection oversees three of the state’s seven registered dispensaries, according to its February filing. Its dispensaries are owned by three Maine residents. But because of the residency requirement, Wellness Connection was unable to sell equity in its business to an interested out-of-state company called High Street Capital Partners, which is what prompted the lawsuit. High Street, based in Delaware, was also a plaintiff in the lawsuit.

“If not for the residency requirement, Maine would be part of a booming national market for investment in medical marijuana companies,” the company’s lawyers wrote in its reply. They pointed out that Maine is using the fact that marijuana is illegal under federal law to appeal the district court’s ruling while also participating in a multimillion-dollar industry despite marijuana’s federal status.

The judges also noted this Thursday.

“There is some great irony in your saying the market is illegal when your state, Maine, along with 33 other states, has chosen to enter the market. And not only to enter the market, but to regulate the market, and to regulate the market in a way that discriminates against nonresidents in Maine,” U.S. Circuit Judge Sandra Lynch said. “You’re asking us to read Congress’s intent as there should be no market, while Maine is busy exploiting the market.”

Medical marijuana is legal in 37 states and the District of Columbia. While Maine prohibits nonresidents from registering dispensaries in the state, the state does allow registered patients in certain other states to buy medical marijuana in Maine.

In its decision last summer, the U.S. District Court pointed out that this means Maine’s medical marijuana industry already involves interstate commerce.

While Maine’s lawsuit against the residency requirement in 2020 was the first filed in the U.S., a federal court in Michigan blocked the residency licensing requirement in the city of Detroit’s adult-use program in June. A federal judge in Missouri made a similar ruling about residency requirements in that state’s medical marijuana program last year.

Medical marijuana is a growing industry in Maine. The number of caregiver employees in the state rose from about 1,883 in 2019 to 4,317 in 2020, and the industry generated more than $3.9 million in revenue for fiscal year 2020, the latest year for which data is available.

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