The latest lawsuit to be filed against New York marijuana regulators over their licensing process is slated for a hearing in federal court on Friday. Attorneys observing the case said this one has the potential to disrupt state cannabis licensing for the third time in two years.
The suit, filed by retail applicant companies Variscite Four and Variscite Five, contends the two were unfairly disqualified because the 51% owners had past marijuana criminal convictions in California instead of New York. The legal action requests a temporary restraining order and preliminary injunction from a federal judge, which would essentially halt New York marijuana retail licensing again, perhaps along with additional store openings.
Given that the same lawyer and a similar company won a preliminary injunction based on similar arguments in late 2022, some observers say they wouldn’t be surprised at all if the same thing happens yet again.
“It’s not the slam dunk it was last time, but there’s definitely a real risk,” attorney Jeffrey Hoffman said.
But, he added, “If there’s an injunction, there’ll be a settlement,” given that the state has been in this situation twice before in the last 12 months, and both times has settled out of court.
New York cannabis lawyer Neil Willner agreed that an injunction is a very real possibility. And that could put on hold all of the business plans from thousands of hopeful cannabis retailers.
“It’s just another reminder that there’s no sure thing in cannabis,” Willner said. “You have to be prepared for injunctions to slow down the process, to halt the process, and to make sure you have more than enough capital to weather any storm like this one.”
The federal judge in the case will have to weigh whether the U.S. Constitution’s Dormant Commerce Clause applies to New York’s cannabis market, as the plaintiffs argue in filings. If it does, then the court should find some of the New York-centric requirements for licensure to be unconstitutional and illegal, as the First Circuit Court in Maine ruled in 2022.
“If Defendants did not want their application program enjoined, Defendants could have removed the unconstitutional residency preferences, like Illinois and Missouri did with their revised application programs after they were sued under the dormant Commerce Clause,” attorney Jeffrey Jensen wrote in a filing on Jan. 19 on behalf of the two Variscite companies.
Jensen noted in the court filing that he’d successfully obtained a preliminary injunction in the first New York Variscite case. That, he argued, makes this time almost a repeat of history.
“Defendants already lost this argument,” he wrote.
The New York Attorney General’s office shot back in court filings of its own that the Dormant Commerce Clause question is far from settled. They noted that a Washington State district court recently ruled the opposite direction and found that state residency requirements in cannabis are still constitutional precisely because of marijuana’s federal illegality.
“The Dormant Commerce Clause cannot be applied to New York’s licensing requirements because there is no interstate market for legalized cannabis,” Deputy New York Attorney General Ryan Hickey wrote in a court filing on Jan. 16.
Hickey went on to say that an injunction “solely based on this meritless constitutional argument” would cause “widespread and significant harm” to the state’s retail cannabis industry, which has struggled to gain a solid foothold.
Hickey also argued that the new Variscite lawsuit violates the settlement agreement from the first Varsicite case, since the first settlement deal – from May 2023 – includes a “release of all claims” against the New York Office of Cannabis Management, its officers, and the state of New York, in exchange for one adult use retail dispensary license.
Willner said that could be a crucial question for the judge to weigh and might be New York’s get-out-of-jail-free card in the case. Or, he said, the judge might decide that the settlement agreement only applies to Variscite NY One, not Variscite Four and Five.
“Because it is different entities … that might be enough for the judge to say ‘No, you can’t hold them to the settlement,'” Willner said.
Another argument the state is advancing in the case is that the primary owners of Variscite Four and Variscite Five aren’t actually in control of the companies. Rather Jensen, a Beverly Hills attorney, was cynically trying to conceal his own business interests, the New York attorney general’s office alleged in court filings.
Jensen is the 49% owner of not just Variscite Four and Variscite Five, but also of three other companies in New York, California, and Washington state that have sued various social equity programs, with similar arguments in order to obtain cannabis retail licenses through litigation.
Jensen is a 49% owner in Variscite NY One – the company that sued New York in 2022 and won a settlement last May – as well as in Peridot Tree WA, the company which lost in federal court earlier this month – and in two cases in Los Angeles and Sacramento, both of which are stayed pending a ruling from the Ninth Circuit Court of Appeals, according to court filings.
Los Angeles residents Dante Kinsey and Justin Palmore are the 51% owners of Variscite Four and Variscite Five, respectively, according to court records. Michigan resident Kenneth Gay is the 51% owner of Variscite NY One, as well as the Peridot companies in California and Washington state.
All three – Kinsey, Palmore, and Gay – have criminal cannabis convictions that Jensen used to argue they all should be eligible for social equity marijuana licenses in various states, per the Constitution’s Dormant Commerce Clause.
The filings paint Jensen as a puppet master pulling the strings of a handful of social equity applicants with criminal records, and allege that he’s the one truly in “sole control” of the businesses attempting to gain New York marijuana permits.
New York’s rules have explicit prohibition on such shadowy business deals in order to keep transparent who is the true beneficiary of cannabis licenses. The regulations also require that each 51% owner maintain the right to execute contracts and power over day-to-day business decisions.
“Neither Plaintiff has a 51% owner who meets these criteria. To the contrary, Plaintiffs’ application materials show that 49% owner Jeffrey Jensen, who has also appeared as counsel to Plaintiffs in this action, has the above powers,” Hickey wrote in his Jan. 19 filing. “Jensen is the sole director, chief executive officer, and managing member of both companies.”
Hickey’s filing continued, “Like the Plaintiffs here, Jensen is a 49% owner of Variscite NY One, Inc. and exercises control over its operations in the same way he does Variscite Four and Variscite Five. Notably, Plaintiffs’ 49% owner Jeffery Jensen is also a 49% owner of the plaintiff in Peridot.”
Jensen did not respond to multiple emails requesting comment.
Willner said it’s also not clear how the judge may lean concerning the “sole control” question, because that could arguably constitute a “substantial defect” in the applications of Variscite Four and Variscite Five, meaning that Jensen’s tactics could end up backfiring.
And although Jensen’s approach may not “sit well” with others in the cannabis industry, Willner said, the strategy is “one that’s worked in New York already, so that’s incentive enough for him to try it again.”
Hoffman summarized, “The easiest way to get a license right now is to sue, apparently.”