Cannabis Industry

New York’s already troubled rollout of the Marihuana Regulation and Taxation Act (“MRTA”) has hit yet another snag. In a ruling late last week, Albany County Supreme Court Justice Kevin R. Bryant invalidated several provisions of the cannabis regulations promulgated by the New York Cannabis Control Board. The final ruling actually scaled back the judge’s own ruling of a day prior, which initially tossed out the entire regulatory scheme.

The online cannabis retailer Leafly filed an Article 78 proceeding against the New York State Office of Cannabis Management, the Cannabis Control Board and the heads of those agencies, arguing that the regulations promulgated to carry out the MRTA were arbitrary and capricious and violated constitutional free speech protections. Specifically, Leafly argued that the regulations banning paid marketing or the advertising of prices and offerings on third-party platforms improperly prohibited Leafly from engaging in lawful commercial speech without advancing a substantial government interest.
On April 3, 2024, Justice Bryant issued a Decision and Order granting the petition and invalidating the entire regulatory scheme of the MRTA as “unlawful and void as arbitrary and capricious.”

The following day, April 4, Justice Bryant issued an Amended Decision and Order that invalidated only the challenged provisions of the regulations relating to third-party platforms.

Specifically, Justice Bryant nullified portions of the “Third-Party Marketing Ban,” which was intended to prohibit cannabis licensees from marketing, promoting or fulfilling orders of their products through a third-party platform or marketplace (such as Leafly). The Order also invalidated the “Third-Party Order Ban,” which prohibited licensees from contracting with a third party for cultivation, processing, distribution or sales of cannabis or cannabis products, as well as the “Pricing Ban,” which had required licensees to only enter into agreements with online third-party platforms that redirected users to the licensee’s website before the products’ prices were displayed. The Court also struck down the “Third-Party All-Licensee Listing Mandate,” which would have required licensees to only enter into agreements with third-party platforms or marketplaces that listed all licensees authorized for the retail sale of cannabis products, and the “Third-Party Distributor Listing Mandate,” which had prohibited licensees from listing their products on a third-party platform or marketplace that restricted information about and did not permit direct negotiation with licensed cannabis distributors.

With regard to the challenged regulations, Justice Bryant held that the various bans were arbitrary and capricious because the state cannabis agencies failed to demonstrate that they considered sufficient (or any) evidence before promulgating their rules. As such, the agencies’ determinations were not entitled to deference from the Court as there was no rational basis in the record for their actions. The judge found that the agencies’ attempts to provide support for the regulations through the case filings was an improper “post hoc rationalization” of their decisions. With regard to Leafly’s free speech challenge, Justice Bryant sidestepped the question of what degree of scrutiny to apply to the bans, finding that the regulations were unconstitutional under any standard of review given the “complete lack of justification” presented by the state agencies in defense of the regulations at issue.

On its face, the ruling invalidates certain restrictions on the use by cannabis operators of third-party platforms to facilitate marketing and sales activities, but its implications are farther reaching. Justice Bryant’s ruling highlights significant substantive and procedural deficiencies underlying the cannabis agencies’ rulemakings. Justice Bryant may have limited the scope of this particular ruling, but the opinion’s description of the flawed and incomplete regulatory process followed by the state agencies here and the legal consequences that necessarily follow has created a clear roadmap for future challenges to New York’s cannabis regulations.