We have been waiting for this.

On September 10^th, a Michigan man asked the U.S. Supreme Court to resolve a circuit split on whether states can discriminate against non-residents in their cannabis licensing programs. This is a fascinating legal question we’ve been mulling on the blog since at least 2015. It’s pure law, and it warrants final resolution.

Background on the case, and the circuit split

The petitioning Michigander, Kenneth Gay, and his company, Peridot Tree, were denied access to Washington State’s cannabis program, second oldest in the country. Peridot was also denied access to licensure in Sacramento, California. Both denials were based upon Gay’s non-resident status. So he sued.

Peridot’s argument is that these denials were unconstitutional under the U.S. Constitution’s dormant commerce clause. The California litigation was filed in 2022, and the Washington litigation in 2023. In the interim, other cases were filed by other plaintiffs in other jurisdictions, also challenging residency requirements for cannabis licensure.

Peridot lost both of his cases. Federal district courts in Washington and California each held that the dormant commerce clause does not apply to marijuana-related commerce, due to the plant’s Schedule I status under the Controlled Substances Act. In January of this year, the Ninth Circuit Court of Appeals affirmed those decisions. My colleague Elijah Hartman covered that ruling here. He explained:

The Ninth Circuit parted ways with a First Circuit decision and a Second Circuit decision, both of which held that state cannabis residency requirements violate the dormant commerce clause, despite the federal illegality of marijuana. The Ninth Circuit instead aligned itself with a growing body of district court decisions (and with dissents from other circuits) emphasizing that illegal markets are constitutionally different in kind.

Put differently: there is no implied constitutional right to engage in illegal interstate commerce according to the Ninth Circuit.

What is the dormant commerce clause?

The dormant commerce clause prohibits states from enacting protectionist policies to favor in-state businesses, or which “unduly burden” interstate commerce. Although the dormant commerce clause is a Constitutional doctrine, you won’t find it printed anywhere on the actual parchment. As Elijah explained:

The Constitution gives Congress the power to regulate interstate commerce. From that affirmative grant, the Supreme Court has long inferred a negative corollary: states generally may not enact laws that discriminate against or unduly burden interstate commerce, even when Congress is silent [….]

At its core, the doctrine is anti‑protectionist. States may not tilt the economic playing field to favor in‑state actors over out‑of‑state competitors. Laws that explicitly discriminate against interstate commerce are frequently per se invalid.

But the Dormant Commerce Clause is also controversial. It is judge‑made, not textually explicit, and the Supreme Court has repeatedly warned that courts must exercise “extreme caution” before using it to invalidate democratically enacted state laws.

Will the Court take the case?

It might. The Supreme Court only grants about 1% of all petitions for certiorari in a given term… but it might.

The current Court is actively engaged with the dormant commerce clause. The most recent case, National Pork Producers Council v. Ross (2023) addressed the dormant commerce clause in the context of another California law, requiring out-of-state sellers to comply with California standards to sell pork within the state. The Court declined to invalidate California’s law. This is arguably not a great precedent, but these are also very different facts, with no federal illegality overlay, and the Court issued a splintered, 5-4 ruling.

One thing that bodes well for Peridot is the fact that Erwin Chemerinsky submitted the petition. Chemerinsky is widely regarded as one of the most prominent Constitutional law scholars in the U.S. Among his prolific output is, in my opinion, the most important law review article ever on state-legal marijuana programs. That piece was written in 2015 but is relevant today.

(Note: Chemerinsky is joined by two other attorneys on the Peridot Tree petition. I don’t mean to shortchange them and I’m sure they are also brilliant; I just don’t recognize those names.)

What happens if residency requirements are invalidated for state-legal cannabis?

A lot. Marijuana-related residency requirements remain the law in many states, including Oklahoma, New Jersey, Washington, Montana, Massachusetts, and probably more. They also apply in various cities and counties—sometimes in specialized contexts such as social equity programs. If Peridot wins, all of these jurisdictions would be forced to tear down the walls.

It’s not just cannabis programs at issue, either. Many states have rules regarding who is allowed to purchase medical marijuana, or grow plants at home. A Peridot victory would presumably upend those restrictions as well. (Schedule III for state-legal medical marijuana does nothing to change this analysis, regardless of the Peridot outcome.)

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Watch this space. In the meantime, for more on cannabis and the dormant commerce clause, check out the following:

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A Michigan cannabis grower proved its case. A jury found that the buyer breached its supply agreement and awarded the grower $31.8 million in damages. But the grower still walked away without an enforceable verdict.

In Hello Farms Licensing MI, LLC v. GR Vending MI, LLC, the U.S. Court of Appeals for the Sixth Circuit reversed the judgment because the contract required the parties to engage in conduct prohibited by the federal Controlled Substances Act (“CSA”). The court held that a federal court could not enforce the agreement, despite Michigan law authorized the underlying cannabis activity.

The September 10, 2026, decision is not binding on California state courts or federal courts in the Ninth Circuit. Nevertheless, it offers an important warning for cannabis operators nationwide: A contract that is valid under state law may still be unenforceable in federal court.

The contract and breach

Hello Farms is a licensed Michigan cannabis cultivator. In November 2020, it entered into an output contract with GR Vending MI, LLC and CURA MI, LLC, both subsidiaries of Curaleaf Holdings, Inc. GR Vending agreed to purchase all cannabis grown by Hello Farms during its 2020 and 2021 harvests, while CURA MI guaranteed GR Vending’s obligations.

When the parties signed the agreement, Hello Farms held licenses to grow medical cannabis. GR Vending held both medical and adult-use retailer licenses.

The parties expected Hello Farms’ 2020 harvest to yield between 12,000 and 15,000 pounds of cannabis. GR Vending also agreed to pay a $2.2 million deposit, subject to refund under specified circumstances.

The agreement contained detailed testing requirements. Hello Farms had to test each 50-pound batch for THC potency and contaminants such as pesticides and heavy metals. Importantly, the contract required the marijuana to satisfy state and local recreational cannabis testing requirements.

Hello Farms ultimately produced approximately 16,300 pounds in 2020. The cannabis passed the required testing, and GR Vending accepted an initial shipment of roughly 2,000 pounds.

Then market prices fell.

GR Vending refused to accept additional deliveries. Hello Farms sold the remaining 2020 harvest to another buyer at lower prices. It also expanded its cultivation operation for 2021, obtained adult-use cultivation licenses, and sold that year’s production to the same alternative buyer.

From state court to federal court

Hello Farms sued for breach of contract in Michigan state court in February 2021. The defendants were able to move the case to the U.S. District Court for the Eastern District of Michigan based on diversity jurisdiction.

That procedural move would become critical.

The defendants asserted that the agreement was illegal under federal law and therefore unenforceable. The district court rejected that defense at summary judgment, and the case proceeded to trial.

The jury found that the defendants breached the contract and awarded Hello Farms $31.8 million. The defendants renewed their request for judgment as a matter of law, but the district court again rejected the federal-illegality defense.

The district court reasoned that the agreement concerned medical cannabis and that the Rohrabacher-Farr appropriations rider reflected a federal policy of tolerating state-compliant medical cannabis activity. The defendants appealed.

Why the verdict became unenforceable

The Sixth Circuit reversed.

As the court explained, federal courts generally apply state substantive law when exercising diversity jurisdiction. But the effect of illegality under a federal statute is a question of federal law. A federal court must therefore determine whether enforcing an agreement would enforce the precise conduct that Congress made unlawful.

That principle proved fatal to Hello Farms.

In the Court’s view, the agreement required Hello Farms to possess cannabis with the intent to distribute that cannabis to GR Vending and enable GR Vending to possess it for further distribution or sale. Each step implicated conduct prohibited by the CSA unless federally authorized.

The court distinguished between a lawful economic transaction that contains an incidental illegal provision and a contract whose central performance is itself federally prohibited. Hello Farms’ agreement fell into the second category because the purchase and distribution of cannabis were the core of the bargain.

The court consequently refused to enforce the defendants’ promise to pay for that performance. It reversed the district court’s denial of judgment as a matter of law, eliminating the prior verdict and Hello Farms’ recovery.

Money damages were no solution

Hello Farms argued that it was not asking the court to order anyone to grow, deliver, or purchase cannabis. The company sought money damages for a transaction that should have occurred years earlier.

The Sixth Circuit found that distinction unpersuasive.

Hello Farms’ lost profits arose from, and were measured by, the defendants’ promise to purchase cannabis. Awarding damages would therefore give Hello Farms the economic benefit it expected from the federally prohibited transaction.

According to the court, federal illegality is not limited to cases seeking specific performance. A court also may refuse to award expectation damages when the plaintiff’s claimed recovery depends on enforcement of the unlawful bargain itself.

This is one of the decision’s most significant lessons. Simply drafting a monetary remedy does not necessarily insulate a cannabis agreement from federal illegality. If the damages represent the profits expected from cannabis cultivation or sales, a federal court may conclude that awarding those damages would indirectly enforce the prohibited performance.

The opinion does not, however, resolve every potential claim involving a cannabis business. It does not hold that federal courts must reject every dispute involving consulting services, intellectual property, real estate, equipment, loans, restitution, or other obligations connected to the industry. The closer the claim is to direct cultivation, possession, purchase, or distribution, the greater the apparent risk under the Sixth Circuit’s reasoning.

Marijuana rescheduling didn’t save the contract

The fact the federal government moved state-legal medical marijuana to Schedule III earlier this year also failed to rescue Hello Farms’ verdict.

The Sixth Circuit explained that the federal change occurred years after the parties entered the contract. Nothing in the rescheduling rule made the change retroactive or transformed the parties’ 2020 agreement into a federally lawful transaction.

The court also noted that Schedule III does not eliminate federal regulatory requirements. State-licensed medical-cannabis businesses may still need DEA registration and applicable FDA approval to cultivate, distribute, or introduce cannabis products into interstate commerce lawfully.

Rescheduling therefore does not mean that every state-licensed cannabis transaction is now federally legal. Whether a particular agreement is enforceable may still depend on when it was executed, the products and markets it covers, the parties’ registrations, and the federal rules applicable to performance.

What California operators should do

The Sixth Circuit’s opinion is not controlling precedent in California or the Ninth Circuit. California courts may analyze contract illegality and public policy differently, and the enforceability of any agreement will depend on its terms, claims, remedy, and forum.

Still, the decision relies heavily on U.S. Supreme Court authority governing the power of federal courts to enforce federally prohibited agreements. California operators should not assume the risk stops at the Sixth Circuit’s boundaries.

The takeaway

Hello Farms convinced a jury that the defendants breached their agreement. It proved substantial damages and obtained a $31.8 million verdict. None of that was enough once the federal appellate court concluded that enforcing the verdict would enforce a federally illegal bargain.

The case does not establish that every cannabis-related agreement is unenforceable. But it does reinforce a basic reality that cannabis contracts must be drafted not only for commercial performance and state regulatory compliance, but also for the court or tribunal that may eventually be asked to enforce them.

In cannabis contracting, a strong damages provision matters, but only if the chosen forum is willing and legally able to enforce the underlying bargain.

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For more updates on recent marijuana legislation, including rescheduling and the DEA rulemaking process, please check out these recent posts:

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