Reed et al v. Montana Department of Revenue

Filing 33

IT IS ORDERED that Defendant's Motions to Dismiss Plaintiffs' original Complaint (Docs. 11, 18) are DENIED as MOOT. IT IS FURTHER ORDERED that Defendant's Motion to Dismiss Plaintiffs' First Amended Complaint (Doc. 29) is GRANTED. Plaintiffs' First Amended Complaint is DISMISSED WITHOUT PREJUDICE. Signed by Magistrate Judge Kathleen L. DeSoto on 3/26/2024. (APP)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MONTANA
HELENA DIVISION

TOM REED and JERRY REED,

CV-23-51-H-KLD

Plaintiffs,
ORDER

vs.
BRENDAN BEATTY, in his official
capacity as the Director of the Montana
Department of Revenue,
Defendant.

This matter comes before the Court on three motions to dismiss filed by
Defendant Brendan Beatty in his official capacity as Director of the Montana
Department of Revenue (“Department” or “Defendant”). Defendant’s first two
motions seek to dismiss Plaintiffs Tom and Jerry Reed’s (“Plaintiffs”) original
Complaint pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6)
(Doc. 11) and the Eleventh Amendment (Doc. 18). Defendant’s third motion seeks
to dismiss Plaintiffs’ First Amendment Complaint (“FAC”) pursuant to Rule
12(b)(1) and 12(h)(3) or, in the alternative, to stay these proceedings (Doc. 29). For
the reasons discussed below, Defendant’s Motions to Dismiss Plaintiffs’ original
Complaint are denied as moot and Defendant’s Motion to Dismiss Plaintiffs’ FAC
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is granted.
I.

Background

In 2021, the Montana Marijuana Regulation and Taxation Act (“MMRTA”)
legalized recreational marijuana use in the state. Under the MMRTA, the
Department has the statutory authority to regulate domestic sales of marijuana in
Montana. Mont. Code Ann. § 16-12-103 (2023). Section 16-12-203(2) contains
several conditions that any putative holder of a marijuana license must satisfy,
including that the Department “may not license a person under this chapter if the
person or an owner, including a person with a financial interest … has resided in
Montana for less than 1 year.” Mont. Code Ann. § 16-12-203(2)(g). The
Department assesses applications to determine if an applicant should be denied.
Mont. Code Ann. § 16-12-104(5). Furthermore, “[a] licensee may sell its marijuana
business … to a person who is licensed by the department under the provisions of
this chapter.” Mont. Code. Ann. § 16-12-104(14). In other words, the MMRTA
requires Department authorization before a person may hold an ownership interest
or “is otherwise in a position to control the marijuana business.” Mont. Code Ann.
§§ 16-12-102(7)(a)(iii), -104(14).
In the spring of 2021, Plaintiffs purchased 32 ownership units in a Montana
limited liability company, MBM Management and Consulting, LLC (“MBM”), for
$2.2 million. (Doc. 28, ¶¶ 10–15). Plaintiffs learned of MBM after reviewing an
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online listing by Marc Hayes and Michael Smith. (Doc. 28, ¶ 10). Hayes and Smith
represented that MBM was legally authorized to cultivate, sell, and produce
marijuana in Montana. (Doc. 28, ¶¶ 10, 14). MBM operated under a marijuana
license held by Therapeutic Essentials, LLC, and its owner, Montana resident
Shonna Grinn. (Doc. 28, ¶ 19).
Plaintiffs purchased MBM in June 2022, investing additional monies beyond
the initial $2.2 million purchase price. (Doc. 28, ¶ 24). In July 2022, Plaintiffs sued
Smith and Hayes in the United States District Court for the District of Montana,
styled Reed v. Smith, CV 22-41-GF-BMM. (Doc. 28, ¶ 34). Plaintiffs voluntarily
dismissed the federal case and subsequently refiled in Madison County District
Court alleging fraud, deceit, breach of contract, and other claims. (Doc. 28, ¶ 26).
That lawsuit is still pending. See Reed v. Smith, DV-29-2022-88 (Madison County
District Court, 5th Judicial District, Montana).
As part of the proceedings in Madison County, Plaintiffs subpoenaed the
Department, seeking Therapeutic Essentials’ records from the METRC system, a
marijuana industry tracking software. (Doc. 28, ¶¶ 35, 36). In response, the
Department requested additional financial information regarding MBM, Plaintiffs,
and Therapeutic Essentials. (Doc. 28, ¶ 42). Subsequently, on March 21, 2023, the
Department issued Therapeutic Essentials a “Notice of Proposed Department
Action to Deny and Revoke Licenses and Opportunity for Hearing.” (Doc. 28, ¶
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43). In the Notice, the Department indicated its intent to revoke Therapeutic
Essentials’ license due to Grinn’s alleged failure to disclose the relationship
between MBM, Plaintiffs, and other individuals in her regulatory filings with the
Department. (Doc. 28, ¶ 44). The revocation proceedings are currently pending
before a Montana administrative law judge. See In the Matter of Proposed Action
No. 23-CCD-REV-053 Against Licensee Therapeutic Essentials, LLC, dba Canna
Connection and Honey Sour, Holder of Montana Marijuana Licenses.
Although not a party to the administrative action, Plaintiffs allege that they
will incur “substantial financial losses” should the Department revoke Therapeutic
Essentials’ license. (Doc. 28, ¶ 48). Plaintiffs seek to protect their investment by
acquiring their own marijuana license. (Doc. 28, ¶ 50). Plaintiffs are currently in
negotiations with a Montana license holder to transfer a license to Creekside
Consulting, a limited liability company Plaintiffs formed in 2022. (Doc. 28, ¶¶ 49,
50). Furthermore, Jerry Reed is moving to Montana and intends to become a
Montana resident. (Doc. 28, ¶ 51). Once his residency is finalized, Jerry Reed will
also seek ownership in a Montana license. (Doc. 28, ¶ 52).
On September 27, 2023, Plaintiffs filed the FAC—now the operative
pleading—realleging their claims against Brendan Beatty in his official capacity as
Director of the Montana Department of Revenue. (Doc. 28). Plaintiffs seek (1) a
declaration that the residency requirement in Section 16-12-203(2)(g) violates the
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Commerce Clause as applied to the facts of this case, (2) a declaration that the
residency requirement in Section 16-12-203(2)(g) violates the Fourteenth
Amendment Privileges or Immunities Clause as applied to Jerry Reed, and (3) a
preliminary and permanent injunction prohibiting Director Beatty from enforcing
Section 16-12-203(2)(g) against Tom Reed and/or Jerry Reed in a manner which
would prohibit them from purchasing a marijuana license. (Doc. 28, ¶¶ 75–76, 84).
Defendants now move to dismiss the FAC pursuant to Rules 12(b)(1) and 12(h)(3)
or, in the alternative, to stay these proceedings pursuant to the Pullman abstention
doctrine. (Doc. 29).
II.

Legal Standard

Article III of the United States Constitution limits federal court jurisdiction
to only actual cases and controversies. U.S. Const. art. III, § 2; Allen v. Wright, 468
U.S. 737, 750 (1984). Article III’s case or controversy requirement mandates that
plaintiffs have standing and that claims be “ripe” for adjudication. Chandler v.
State Farm Mut. Auto. Ins., 598 F.3d 1115, 1121 (9th Cir. 2010). Challenges to
standing and ripeness are properly raised in a Rule 12(b)(1) motion to dismiss
because both “pertain to federal courts’ subject matter jurisdiction.” Chandler, 598
F.3d at 1122. The party asserting federal subject matter jurisdiction bears the
burden of establishing its existence. Chandler, 598 F.3d at 1122. “[E]ach element
must be supported in the same way as any other matter on which the plaintiff bears
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the burden of proof, i.e., with the manner and degree of evidence required at the
successive stages of the litigation.” Lujan v. Defenders of Wildlife, 504 U.S. 555,
561 (1992). Under Rule 12(h)(3), if a court “determines at any time that it lacks
subject matter jurisdiction, the court must dismiss the action.” Fed. R. Civ. P.
12(h)(3).
“[T]he irreducible constitutional minimum of standing contains three
elements”: (1) “injury in fact,” i.e., an “invasion of a legally protected interest
which is (a) concrete and particularized, and (b) actual or imminent, not
conjectural or hypothetical”; (2) causal connection, i.e., that the “injury is fairly
traceable to the challenged conduct of the defendant”; and (3) that the “injury will
likely be redressed by a favorable decision.” Chandler, 598 F.3d at 1122 (citing
Lujan, 504 U.S. at 560–61). The “touchstone for determining injury in fact is
whether the plaintiff has suffered an injury or threat of injury that is credible, not
‘imaginary or speculative.’” Lopez v. Candaele, 630 F.3d 775, 786 (9th Cir. 2010)
(citation omitted).
When faced with a motion to dismiss for lack of standing, the court must
accept as true all material allegations in the complaint and must construe the
allegations in the nonmovant’s favor. Chandler, 598 F.3d at 1121. The court may
not speculate as to the allegations’ plausibility. Chandler, 598 F.3d at 1121.
//
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III.

Discussion
A. Motions to Dismiss Plaintiffs’ Original Complaint

Plaintiffs filed their original Complaint against the Montana Department of
Revenue on August 24, 2023 (Doc. 1). The Department moved to dismiss the
Complaint pursuant to Rules 12(b)(1) and 12(b)(6) (Doc. 11) and pursuant to the
Eleventh Amendment (Doc. 18). Although Plaintiffs responded substantively to the
Department’s first Motion to Dismiss (Doc. 24), Plaintiffs subsequently
acknowledged that their claims against the State of Montana were indeed barred by
the Eleventh Amendment. (Doc. 25). As a result, Plaintiffs filed the FAC to
reallege their claims against Brendan Beatty in his official capacity as Director of
the Montana Department of Revenue (Doc. 28).
The effect of an amended complaint is to supersede the original complaint,
rendering it a nullity. See Lacy v. Maricopa County, 693 F.3d 896, 927 (9th Cir.
2012) (en banc) (the general rule is that an amended complaint “super[s]edes the
original complaint and renders it without legal effect.”). Therefore, Defendant’s
related motions to dismiss (Docs. 11, 18) are denied as moot.
B. Motion to Dismiss Plaintiffs’ First Amended Complaint
Plaintiffs first lodge an as-applied challenge under the Commerce Clause,
Art. I, § 8, cl. 3, arguing that Section 16-12-203(2)(g) discriminates against nonresidents who wish to participate in Montana’s domestic marijuana market. (Doc.
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28, ¶¶ 63–64, 75). The Commerce Clause both expressly grants Congress the
power to regulate commerce among the several states and implicitly limits the
states’ power to discriminate against interstate commerce. See U.S. Const. Art. I, §
8, cl. 3; New Energy Co. of Ind. v. Limbach, 486 U.S. 269, 273 (1988). The
Commerce Clause “encompasses an implicit or ‘dormant’ limitation on the
authority of the States to enact legislation affecting interstate commerce.” Healy v.
The Beer Inst., Inc., 491 U.S. 324, 326, n.1 (1989). “[I]n all but the narrowest
circumstances, state laws violate the Commerce Clause if they mandate
‘differential treatment of in-state and out-of-state economic interests that benefits
the former and burdens the latter.’” Granholm v. Heald, 544 U.S. 460, 472 (2005)
(quoting Or. Waste Sys., Inc. v. Dep’t of Envtl. Quality of Or., 511 U.S. 93, 99
(1994)).
Plaintiffs next lodge an as-applied Privileges or Immunities claim, arguing
that Section 16-12-203(2)(g) violates the Privileges or Immunities Clause of the
14th Amendment. (Doc. 28, ¶ 76). The Privileges or Immunities Clause provides
that “[n]o State shall make or enforce any law which shall abridge the privileges or
immunities of citizens of the United States ….” U.S. Const. amend. XIV, § 1. The
Supreme Court has interpreted these “privileges or immunities” to include the right
to travel, which embraces the right of newly arrived citizens to enjoy the same
privileges or immunities as those enjoyed by other citizens of their new state.
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Saenz v. Roe, 526 U.S. 489, 490 (1999); See Slaughter-House Cases, 83 U.S. 36
(1872).
Defendants move to dismiss the FAC on grounds that Plaintiffs have failed
to meet the minimum requirements for standing and ripeness.
1. Standing
Defendants argue that Plaintiffs fail to satisfy the first element required for
standing—"injury in fact”—for three reasons: (1) Plaintiffs’ harms are linked to the
uncertain outcome of a state administrative proceeding; (2) Plaintiffs have not
applied for a marijuana license; and (3) Jerry Reed has not established residency in
Montana. (Doc. 30 at 8–10). For their part, Plaintiffs contend their injuries stem
directly from the MMRTA residency requirement, irrespective of the
administrative proceeding’s outcome. (Doc. 31 at 9). Specifically, Plaintiffs claim
that if the administrative judge revokes Therapeutic Essentials’ license, Section 1612-203(2)(g) will “bar[] them from applying” for their own license; on the other
hand, if Therapeutic Essentials retains their license, the Department “will still
shutter [Plaintiffs’] operations” pursuant to Section 16-12-203(2)(g). (Doc. 31 at
9). Citing Bishop Paiute Tribe v. Inyo County, Plaintiffs aver that “[a]llegations
that support a ‘threat’ to a ‘concrete interest as actual and imminent’ are sufficient
to allege an injury in fact that meets the requirements of constitutional ripeness.”
863 F.3d 1144, 1154 (9th Cir. 2017).
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In Bishop Paiute Tribe, a tribal police officer was arrested by California law
enforcement personnel for actions taken while detaining a suspect; subsequently,
state law enforcement instructed tribal police to “cease and desist” their exercise of
peace officer authority or be subject to state prosecution. Bishop Paiute Tribe, 863
F.3d at 1144–49. The Tribe sued, seeking clarification as to the scope of their
authority. The court observed that, “[w]hile generalized threats of prosecution do
not confer constitutional ripeness, a genuine threat of imminent prosecution does.”
Bishop Paiute Tribe, 863 F.3d at 1153. The court found that a genuine threat
existed because “in addition to the actual arrest and prosecution” of the tribal
officer, the state’s “cease and desist letter credibly threaten[ed] imminent future
prosecutions” if the Tribe failed to follow the state’s demands. Bishop Paiute
Tribe, 863 F.3d at 1153.
Turning to the instant case, Plaintiffs correctly observe that allegations
supporting a “threat to a concrete interest” are sufficient to establish “injury in
fact.” (Doc. 31 at 10). However, to determine whether a genuine threat exists, the
court
look[s] to whether the plaintiffs have articulated a
concrete plan to violate the law in question, whether the
prosecuting authorities have communicated a specific
warning or threat to initiate proceedings, and the history
of past prosecution or enforcement under the challenged
statute.
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Bishop Paiute Tribe, 863 F.3d at 1154 (quoting Thomas v. Anchorage Equal Rights
Comm’n, 220 F.3d 1134, 1139 (9th Cir. 2000). The facts before this Court do not
establish such an imminent threat. Unlike Bishop Paiute Tribe, there is no “cease
and desist” letter or its equivalent, the Department has not threatened to enforce
nor taken any action to enforce the challenged statute against Plaintiffs, and there
is no “history of past enforcement under the challenged statute.” Plaintiffs’
argument that the Department is “insisten[t] on applying Section 16-12-203(2)(g)”
against them is unsupported by the FAC and is insufficient to establish the
existence of a “specific warning or threat.” (Doc. 31 at 14).
Plaintiffs next rely on Susan B. Anthony List v. Driehaus, maintaining that
the “injury in fact” prong “does not require [Plaintiffs] to wait until they are
unconstitutionally punched in the face by the State” in order to establish standing.
573 U.S. 149 (2014). In Susan B. Anthony List, the court considered a preenforcement challenge to a criminal statute prohibiting core political speech. 573
U.S. at 161. The Ohio Elections Commission found probable cause under the
statute to investigate petitioner, an anti-abortion organization, for its statement that
a congressman had voted for “taxpayer-funded abortion.” Susan B. Anthony List,
573 U.S. at 162.
The Commission never reached a final determination on the merits,
however, and never enforced the statute against petitioner. Susan B. Anthony List,
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573 U.S. at 162. The court nonetheless found standing because (1) “the petitioner’s
intended future conduct concern[ed] political speech, [which] is certainly ‘affected
with a constitutional interest’”; (2) the statute included petitioner’s false statements
about taxpayer-funded abortion; and (3) the threat of future enforcement was
“obviously” substantial because petitioner was already the subject of a complaint
for similar conduct. Susan B. Anthony List, 573 U.S. at 161–64.
The “threatened enforcement” alleged here does not rise to the “sufficiently
imminent” variety contemplated in Susan B. Anthony List. Rather, Plaintiffs’
injuries are tied to the uncertain outcome of revocation proceedings before an
administrative law judge—which, notably, are not the result of the challenged
statute, but rather of Therapeutic Essentials’ alleged violations of Montana’s
disclosure requirements. (See Doc. 28, ¶ 48) (Claiming that “[i]f the license for
Therapeutic Essentials should be revoked, the Reeds will immediately lose the
substantial sums of money that they invested, in good faith, in the marijuana
market in Montana.”). Moreover, unlike Susan B. Anthony List, Plaintiffs aver only
hypothetical threats of enforcement. Although Plaintiffs argue that the Department
“will not allow” their application, they have not applied for—let alone been
denied—a marijuana license. (Doc. 28, ¶¶ 50–54).
Finally, Plaintiffs’ claims relating to Jerry Reed are even more conjectural.
The FAC alleges Jerry Reed intends to move to Montana, become a resident, and
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apply for a marijuana license; these “some day” intentions do not support a finding
of the “actual or imminent injury” required for standing. (Doc. 29, ¶¶ 67–72, 76);
See Lujan, 504 U.S. at 564 (citation omitted). Although Plaintiffs may indeed have
“skin in the game” with respect to their investment with Therapeutic Essentials,
any potential harm is related to the outcome of that proceeding and is not, at this
juncture, related to their residency or lack thereof. (Doc. 31 at 13).
Accordingly, the Court finds that Plaintiffs have failed allege facts indicative
of “sufficiently imminent” harm. Because Plaintiffs fail to establish an “injury in
fact”, the Court need not consider causation and redressability.
2. Ripeness
The doctrine of ripeness provides federal courts with a means to “dispose of
matters that are premature for review because the plaintiff’s purported injury is too
speculative and may never occur.” Chandler, 598 F.3d at 1122. Like their
arguments above, Defendants similarly argue that Plaintiffs’ as-applied
constitutional challenges are unripe because (1) they have not applied for nor been
denied a marijuana license based on residency, (2) their concerns of financial harm
relate to the uncertain outcome of Therapeutic Essentials’ administrative
proceedings, and (3) Jerry Reed’s claimed injuries relate to his plans to “someday”
become a Montana resident. (Doc. 30 at 13–14).
In response, Plaintiffs contend that should Therapeutic Essentials’ license be
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revoked, “the Department has made clear it will rely upon [Section 16-12203(2)(g)]” to prohibit Plaintiffs from operating under another license until they
have satisfied Montana’s residency requirement. (Doc. 31 at 16). Alternatively,
Plaintiffs argue, “[i]f Therapeutic Essentials survives the revocation proceeding,
another round will be sure to follow since the Department wants to enforce Section
16-12-203(2)(g) against [Plaintiffs].” (Doc. 31 at 16). Plaintiffs maintain that
“[w]ithholding the resolution of this question would certainly cause great hardship
to [Plaintiffs] because this issue is not going away for them.” (Doc. 31 at 16, 17).
Plaintiffs’ arguments only highlight the uncertainty of their alleged injuries.
Indeed, as Plaintiffs themselves emphasize,
Whether a claim is ripe generally turns on the fitness of the issues
for judicial decision and the hardship to the parties of withholding
court consideration. The “central concern [of the ripeness inquiry]
is whether the case involves uncertain or contingent future events
that may not occur as anticipated, or indeed may not occur at all.”
(Doc. 31 at 16–17) (citing Richardson v. City and County of Honolulu, 124 F.3d
1150, 1161 (9th Cir. 1997) (quoting 13A Charles Alan Wright et al., Federal
Practice and Procedure § 3532 at 112 (2d ed. 1984)). Pursuant to Montana Code
Annotated § 16-12-104(5), the Department assesses applications to determine if the
applicant should be denied. Mont. Code Ann. § 16-12-104(5). At this point,
however, the injuries of which Plaintiffs complain are contingent upon “future
events that may or may not occur”—specifically, the administrative judge revoking
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Therapeutic Essentials’ license, Plaintiffs applying for and being denied a license
due to Montana’s statutory residency requirement, and Jerry Reed moving to
Montana and establishing residency. (See Doc. 28, ¶¶ 48, 51–54).
Plaintiffs’ claims are therefore not yet ripe for federal adjudication. Should
Plaintiffs apply for a license and be rejected pursuant to Section 16-12-203(2)(g),
or should Jerry Reed move to Montana, establish residency, and apply for a license
before he has resided in the state for one year, then perhaps Plaintiffs’ concerns
may ripen into a claim upon which this Court may issue relief.
IV.

Conclusion

Therefore, for the reasons stated above,
IT IS ORDERED that Defendant’s Motions to Dismiss Plaintiffs’ original
Complaint (Docs. 11, 18) are DENIED as MOOT.
IT IS FURTHER ORDERED that Defendant’s Motion to Dismiss Plaintiffs’
First Amended Complaint (Doc. 29) is GRANTED. Plaintiffs’ First Amended
Complaint is DISMISSED WITHOUT PREJUDICE.
DATED this 26th day of March, 2024.

Kathleen L. DeSoto
United States Magistrate Judge

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