Recreational pot leads to questions of first impression — and legal headaches

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As recreational marijuana businesses begin to operate under Michigan’s new law, the overlay of local, state and federal regulations gives rise to a host of legal questions over the rights of marijuana business owners.

Cannabis has the potential to be big business in Michigan. The state House Fiscal Agency estimates annual sales of approximately $949 million when the recreational market gets up and running this year. This will add $94.9 million from the excise tax and another $57 million from sales tax to Michigan coffers.

But this still is an emerging field and already is giving rise to land use issues and tensions between marijuana business owners and local governments. Although legal under state law, marijuana was declared illegal in the 1930s and remains so under the federal Controlled Substances Act. A largely unresolved question at this point is how strongly will the courts protect the property and constitutional rights of marijuana businesses when their entire business is based on a product that is illegal under federal law?

Add into the mix the question of how far municipalities can go in regulating marijuana businesses. This legal landscape gives rise to numerous questions of “first impression,” which refers to when a court is presented with a specific legal issue that has not yet been addressed by previous decisions. When it comes to issues surrounding marijuana businesses in Michigan, these will ultimately have to be answered by the courts.

Issues to watch

In November 2019, recreational marijuana became legal after Michigan voters approved a statewide ballot initiative. The law required municipalities to proactively opt out if they did not want to welcome facilities that grow, process, test, store, distribute or sell recreational marijuana.

Many municipalities across the state have decided to welcome this potential boost to their local economy, while others have opted out. Some municipalities did not do either. But now that Michigan’s Marijuana Regulatory Agency has started issuing permits and owners begin to set up shop, there can be a local backlash, resulting in attempts by the local government to quickly amend its ordinances to restrict or prohibit marijuana business.

This dynamic, among others, will inevitably result in disputes between marijuana businesses and governmental entities that make their way to state and federal courts. When you are navigating what can be a minefield of local politics, it is critical to understand your legal rights as a business owner:

  • Due process: The due process clause of the Constitution protects businesses and property owners from arbitrary, capricious and unreasonable actions by the government. In this context, due process questions arise when the government deprives the business of lawfully issued permits or attempts to shut the business down without first providing the business with notice and a fair opportunity to be heard.

  • Regulatory taking: Closely related to due process is the takings clause of the Constitution, which prohibits the government from taking private property without compensating the owner. When a government deprives a business of its property interest in a permit or attempts to regulate the activities of the business in a way that simply goes too far, the result can create a severe economic impact that unreasonably interferes with the investment-backed expectations of the owner. In such cases, the regulation may be so restrictive that it rises to the level of a “taking,” in violation of the Constitution’s command that the government cannot take your property without just compensation.

  • Vested rights, nonconforming use and estoppel: These doctrines typically come into play to protect the rights of a property owner who has an established, lawful use. The most common example is when a business receives permits and begins operations consistent with current zoning ordinances, but municipal officials later have a change of heart and amend ordinances in a way that attempts to restrict or eliminate the owner’s established operations.

This list is not exhaustive, and these doctrines will continue to develop as courts resolve the inevitable disputes that arise involving marijuana businesses. As Michigan continues to navigate the uncertain waters of cannabis, business owners looking to break into the industry would do well to have a strong understanding of their rights and the legal landscape to mitigate future uncertainty. 

Thomas M. Amon is a commercial litigator at the law firm of Warner Norcross + Judd LLP who focuses his practice on complex legal disputes. He can be reached at tamon@wnj.com.

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