In January, the U.S. Court of Appeals for the Ninth Circuit ruled 3-0 that the Dormant Commerce Clause does not prohibit states from imposing residency requirements for obtaining marijuana business licenses. The court found that the federal illegality of marijuana renders Dormant Commerce Clause protections inapplicable, cementing a circuit split on the constitutionality of state residency rules for marijuana licenses.
The Ninth Circuit’s analysis diverged from earlier decisions of the First and Second Circuits in 2022 and 2025, respectively, in which those courts overturned state laws that favored state residents in the marijuana licensing process. See our coverage of the First Circuit decision here. Now that the Ninth Circuit has ruled differently, the time may be approaching for the U.S. Supreme Court to resolve whether the Dormant Commerce Clause prohibits states from giving residents preferential treatment over nonresidents when issuing marijuana licenses.
Background: City of Sacramento and Washington State Residency Rules
In Peridot Tree WA Inc. v. Washington State Liquor and Cannabis Control Board, No. 24-3481 (9th Cir.), the Ninth Circuit considered the constitutionality of residency rules at the municipal level in Sacramento, CA, and at the state level in Washington.
Sacramento’s Cannabis Opportunity Reinvestment and Equity (CORE) Program licenses medical and recreational marijuana dispensaries in the city. Under the CORE Program, five license classifications were established, two of which were reserved for “[a] current or former resident of the City of Sacramento” who meets certain requirements related to income and the impacts of previous cannabis-related arrests or convictions. See Peridot Tree, 2026 U.S. App. LEXIS 14, *6-7. Sacramento set aside 10 of the 40 dispensary permits specifically for participants qualifying for these classifications. See id. at *7.
Washington imposes a statutory six-month residency requirement by statute. Id.; see Wash. Rev. Code § 69.50.331(b) (prohibiting the issuance of a license to “[a] person doing business as a sole proprietor who has not lawfully resided in the state for at least six months prior to applying to receive a license”). Additionally, under Washington’s Social Equity Program, the state Liquor and Cannabis Board reserves retail licenses exclusively for social equity applicants. See id. § 69.50.355(1)(a), (2)(a).
Among the criteria for the Social Equity Program is a requirement that “[a]t least a 51 percent majority, or controlling interest, in the applicant, must be held by a person, or persons, who” meets the six-month residency requirement and satisfies at least two of the following: (1) the applicant or applicants have lived in a “disproportionately impacted area” in Washington state for at least five years between 1980 and 2010; (2) the applicant or a family member of the applicant was arrested or convicted of a cannabis offense; or (3) the applicant’s household income in the year prior to submitting the application was less than the median household income for Washington state. See id. § 314-55-570(4). A “disproportionately impacted area” generally refers to an area in Washington state where members of the community were more likely to be impacted by the war on drugs. See id. § 314-55-570(1)(a).
Procedural Posture
Peridot Tree, Inc. (in California) and Peridot Tree WA, Inc. (in Washington) — both majority owned by a Michigan resident — challenged the Sacramento and Washington residency rules in separate federal cases. See Peridot Tree Inc. et al. v. City of Sacramento et al., No. 2:22-cv-289 (E.D. Cal.); Peridot Tree WA Inc. v. Washington State Liquor and Cannabis Board et al., No. 3:23-cv-6111 (W.D. Wash.).
In both cases, the federal district courts dismissed the suits, finding that the Dormant Commerce Clause does not apply to residency requirements for marijuana dispensaries because marijuana is illegal under federal law. See Peridot Tree, 2026 U.S. App. LEXIS 14, *10. The Ninth Circuit consolidated the appeals of these cases for oral argument and subsequently issued a single opinion to resolve both.
Ninth Circuit Ruling and Reasoning
The Ninth Circuit affirmed the district courts’ dismissals, finding that the Dormant Commerce Clause “need not be extended to facilitate interstate commerce that is illegal under federal law.” Id. at *19. Citing the U.S. Supreme Court’s decision in General Motors Corp. v. Tracy, 519 U.S. 278 (1997), the Ninth Circuit explained that the “fundamental objective” of the Dormant Commerce Clause is to “preserv[e] a national market for competition undisturbed by preferential advantages conferred by a State upon its residents or resident competitors.” Id. at *19-20. This “fundamental objective,” the court said, “surely wanes when the national marketplace is prohibited under federal law.” Id. at *20.
The appeals court further stated that it has a responsibility in the context of a Dormant Commerce Clause challenge “to determine whether action taken by state or local authorities unduly threatens the values the Commerce Clause was intended to serve.” Id. (quoting Wardair Canada, Inc. v. Florida Dep’t of Revenue, 477 U.S. 1, 7 (1986)). Here, the Ninth Circuit echoed the dissent in the 2022 First Circuit case. Although the court acknowledged that the Dormant Commerce Clause “reflects an anti-discrimination rule,” it did “not see why the Constitution would insist that we protect the free-flowing operation of illegal interstate commerce.” Id. (citing Northeast Patients Grp. v. United Cannabis Patients & Caregivers of Maine, 45 F.4th 542, 559 (1st Cir. 2022) (Gelpi, J., dissenting)) (cleaned up).
Effect of Current and Future Marijuana Policy
Notably, in December 2025, President Donald Trump issued an executive order directing the U.S. attorney general to “take all necessary steps to complete the rulemaking process related to rescheduling marijuana to Schedule III of the [Controlled Substances Act (CSA)] … in accordance with Federal law.” Increasing Medical Marijuana and Cannabidiol Research, Executive Order (Dec. 18, 2025). The Ninth Circuit noted the recent executive order but observed that “[n]evertheless, at this time, marijuana remains illegal under the CSA.” Peridot Tree, U.S. App. LEXIS 14, *6.
Regarding the federal government’s current reticence to bring enforcement actions against state-compliant marijuana businesses, the court largely declined to consider the current or future federal enforcement posture. Rather, the court stated that “[t]he mixed signals that the federal government has sent about marijuana legalization at the state level do not change our calculus.” Id. at *22. The “assessment of the dormant Commerce Clause’s reach cannot turn on how much the political branches still believe in the laws that are on the books.” Id.
The Ninth Circuit noted the Second Circuit’s conclusion that, absent the Dormant Commerce Clause’s protections, “States would then be free today to bake in advantages for their residents should Congress later legalize the market.” Variscite NY Four, LLC v. N.Y. State Cannabis Control Bd., 152 F.4th 47, 61 (2d Cir. 2025). The panel rejected this reasoning, however, stating that “the possibility that Congress might one day legalize marijuana or that marijuana may at some point become reclassified under the CSA provides no basis for the judicial enabling of a marketplace that is presently not supposed to exist as a matter of federal law.” Id. at *23.
Why It Matters
The Ninth Circuit’s decision in this case has created a circuit split on the issue of whether a federally illegal market is nonetheless subject to the nondiscrimination protections of the Dormant Commerce Clause. The appellants have until March 17, 2026, to file a petition for en banc rehearing of the case before the full panel of Ninth Circuit judges. See Order, Peridot Tree WA, Inc. v. Washington State Liquor and Cannabis Control Bd., No. 24-3481 (Jan. 8, 2026) (granting appellants’ unopposed motion for an extension of time in which to file a petition for rehearing). Thus, it remains to be seen whether these litigants will seek to bring the issue to the Supreme Court for ultimate resolution.
In context of other Ninth Circuit jurisprudence, this decision is the latest in which the court has found that certain legal paradigms do not apply to dealings with marijuana. See, e.g., United States v. Langley, 17 F.4th 1273 (9th Cir. 2021) (finding no substantive due process right to use medical marijuana); Shulman v. Kaplan, 58 F.4th 404 (9th Cir. 2023) (holding that marijuana businesses lacked statutory standing to assert RICO claims).
Practically speaking, the states and territories of the Ninth Circuit — Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, Washington, Guam, and the Northern Mariana Islands — are free to implement marijuana licensing programs that openly discriminate against nonresident applicants. As our team has discussed here, state business licensing regimes favoring residents over nonresidents are largely unseen today, having been rejected by courts as Dormant Commerce Clause violations.
Our Cannabis Practice provides advice on issues related to applicable federal and state law. Cannabis remains an illegal controlled substance under federal law.