C.Y. Wholesale, Inc. v. Eric Holcomb ( 2020 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 19-3034
C.Y. WHOLESALE, INC., et al.,
Plaintiffs-Appellees,
v.
ERIC HOLCOMB, et al.,
Defendants-Appellants.
____________________
Appeal from the United States District Court for the
Southern District of Indiana, Indianapolis Division.
No. 1:19-cv-02659 — Sarah Evans Barker, Judge.
____________________
ARGUED APRIL 14, 2020 — DECIDED JULY 8, 2020
____________________
Before EASTERBROOK, KANNE, and WOOD, Circuit Judges.
WOOD, Circuit Judge. A group of Indiana-based hemp
sellers and wholesalers sued the State of Indiana and its gov-
ernor, seeking to enjoin the enforcement of the state’s criminal
prohibition on the manufacture, delivery, or possession of
smokable hemp. Ind. Code § 35-48-3-10.1. The plaintiffs (col-
lectively “C.Y. Wholesale”) argue that Indiana’s law is
preempted by the Agriculture Improvement Act of 2018 and
barred by the Commerce Clause of the Constitution. The
2 No. 19-3034
district court issued the requested injunction, and Indiana has
appealed.
We conclude that although C.Y. Wholesale may have been
entitled to block certain aspects of Indiana’s law, the injunc-
tion before us sweeps too broadly. We therefore vacate it and
remand to the district court for further proceedings.
I
As part of the 2014 Farm Law, Congress permitted states
and research institutions to cultivate industrial hemp for re-
search purposes without needing first to obtain approval
from the Drug Enforcement Administration (DEA). Industrial
hemp is a product derived from the cannabis plant, but it is
distinguishable from conventional marijuana in one crucial
respect: it has a much lower concentration of tetrahydrocan-
nabinol (THC), the principal psychoactive constituent of can-
nabis. The law defines industrial hemp as “the plant Cannabis
sativa L. and any part of such plant, whether growing or not,”
with a delta-9 THC concentration of 0.3% or less. Pub L. No.
113-79, § 7606. The 2014 Law allowed states to continue to
prohibit the production of industrial hemp, and it permitted
cultivation only where it was “allowed under the laws of the
State.” Id. Under the 2014 Law, industrial hemp plants and
seeds (as before) could “not be transported across State lines.”
81 Fed. Reg. 53,395 (Aug. 12, 2016).
In 2018, Congress passed another Farm Law. This one ex-
pands the definition of industrial hemp to include not only all
parts of the cannabis plant with a low THC concentration but
also all low-THC cannabis derivatives. The 2018 Law excludes
industrial hemp from the federal definition of marijuana, thus
removing it from the DEA’s schedule of controlled
No. 19-3034 3
substances. Pub. L. No. 115-334, § 12619 (codified at 21 U.S.C.
§§ 802(16)(B)(i), 812). Nonetheless, the 2018 Law expressly
provides that the states retain the authority to regulate the
production of hemp. 7 U.S.C. § 1639p (“Nothing in this subsec-
tion preempts or limits any law of a State … that regulates the
production of hemp and is more stringent than this subchap-
ter.”). Of interest here, the 2018 Law forbids the states from
“prohibit[ing] the transportation or shipment of hemp or
hemp products … through the State.” Id. § 1639o note.
In 2019, Indiana passed Senate Enrolled Act 516 (Act 516),
which brings Indiana’s definition of industrial hemp into line
with the 2018 federal definition and legalizes the commercial
production of hemp in the state. The Act sets up a regulatory
framework for the Indiana hemp industry, including the es-
tablishment of an advisory committee to create rules and reg-
ulations for hemp production. It criminalizes the possession
of “smokable hemp,” which it defines as any industrial hemp
product “in a form that allows THC to be introduced into the
human body by inhalation of smoke.” Ind. Code § 35-48-1-
26.6. The law stipulates that “[a] person who knowingly or
intentionally manufactures, finances the manufacture of, de-
livers, finances the delivery of, or possesses smokable hemp
… commits dealing in smokable hemp, a Class A misde-
meanor.” Ind. Code § 35-48-4-10.1. In this litigation, Indiana
has represented to the court that one reason for these provi-
sions in the Act is that its law enforcement officers find it
nearly impossible to distinguish between low-THC smokable
hemp and marijuana in the field.
Days before Act 516 was to go into effect, C.Y. Wholesale
filed this suit, seeking a preliminary injunction against the
provisions of the law that criminalized the manufacture,
4 No. 19-3034
financing, delivery, and possession of smokable hemp. C.Y.
Wholesale argued that Act 516’s prohibition on the possession
and delivery of smokable hemp was preempted by the Farm
Law’s mandate that states allow all forms of industrial hemp
to be transported through their territories. It additionally ar-
gued that Act 516 violated the federal Constitution’s Com-
merce Clause. The district court found that the hemp sellers
had shown a strong likelihood of success on the merits of their
express preemption theory, and some likelihood of success on
their conflict-preemption theory. It therefore issued an injunc-
tion blocking “the portions of [Act] 516 that criminalize the
manufacture, financing, delivery, or possession of smokable
hemp.” The court did not address the plaintiffs’ arguments
under the Commerce Clause, but it did comment that it found
this point “less convincing.” Indiana has appealed from the
issuance of the injunction. See 28 U.S.C. § 1292(a)(1).
After briefing in this appeal but before oral argument, In-
diana passed Senate Enrolled Act 335 (Act 335), which limits
the scope of Act 516. Act 335 clarifies that Indiana’s prohibi-
tion on the delivery and possession of smokable hemp does
“not apply to the shipment of smokable hemp from a licensed
producer in another state in continuous transit through Indi-
ana to a licensed handler in any state.” Ind. Code § 35-48-4-
10.1(c). Indiana asserts that this new language resolves any
ambiguity in the statute that might have given rise to a prob-
lem with the express preemption clause of the Farm Law. At
the time of oral argument before this court, Act 335 had been
signed into law, but had not yet gone into effect. Both for that
reason, and because many of the arguments are unaffected by
Act 335, we focus primarily on Act 516.
No. 19-3034 5
II
As a preliminary matter, we note that the district court
failed to enter a standalone document containing the injunc-
tion, as required by Federal Rules of Civil Procedure
65(d)(1)(C) and 58(a). We asked the parties to address the sig-
nificance of this omission in their briefs. Both parties took the
position that it was not a jurisdictional flaw. See Bankers Trust
Co. v. Mallis, 435 U.S. 381, 387 (1978) (“[P]arties to an appeal
may waive the separate judgment requirement of Rule 58.”);
Metzl v. Leininger, 57 F.3d 618, 619 (7th Cir. 1995) (“[V]iolations
of Rule 58 are not jurisdictional.”). We agree with that conclu-
sion.
Nonetheless, the district court’s failure to abide by the sep-
arate-document command is not, at least in this case, a tech-
nical nit that we can disregard. Instead, it has an effect on the
clarity of the injunction. The court reasoned that Act 516
would put market participants who transport industrial
hemp through Indiana at risk of criminal prosecution, in vio-
lation of the express preemption clause of the 2018 Farm Law.
Yet it broadly enjoined the portions of Act 516 that criminalize
much more than transportation, including the manufacture,
financing, delivery, or possession of smokable hemp. It did so
without any explanation of why that breadth was necessary.
It seems to us that there is a missing step in the district court’s
reasoning. The failure to enter an independent injunction re-
quires one to infer the scope of the injunction from the opin-
ion, and regrettably, the opinion’s conclusion is not fully sup-
ported by its analysis. The discipline of the separate-order
rule would likely have averted this problem, and so we once
again remind district judges not to overlook it.
6 No. 19-3034
III
We now move to the injunction itself. A preliminary in-
junction is appropriate where the party seeking it: (1) is likely
to succeed on the merits; (2) is likely to suffer irreparable
harm in the absence of preliminary relief; (3) has shown that
the balance of equities tips in her favor; and (4) has shown that
an injunction is in the public interest. Winter v. Natural Re-
sources Defense Council, Inc., 555 U.S. 7, 20 (2008).
When reviewing the issuance of a preliminary injunction,
this court “review[s] the district court’s findings of fact for
clear error, its legal conclusions de novo, and its balancing of
the factors for a preliminary injunction for abuse of discre-
tion.” D.U. v. Rhoades, 825 F.3d 331, 335 (7th Cir. 2016). “The
question for [this Court] is whether the judge exceeded the
bounds of permissible choice in the circumstances, not what
we would have done if we had been in his shoes.” Cooper v.
Salazar, 196 F.3d 809, 813 (7th Cir. 1999).
Our focus here, as is often the case, is on the first issue:
likelihood of success on the merits. At the district court, C.Y.
Wholesale offered three principal reasons why it cleared that
hurdle. First, it argued that Act 516 was expressly preempted
by the terms of the 2018 Farm Law. Second, it argued that Act
516 was preempted by the 2018 Farm Law under principles of
conflict preemption. Finally, it argued that Act 516 violates
the Commerce Clause of the Constitution. We address these
contentions in that order.
A
The district court found that federal law expressly
preempted Act 516’s provisions criminalizing the possession,
manufacture, and delivery of smokable hemp. Express
No. 19-3034 7
preemption exists when Congress “declares its intention to
preempt state regulation through a direct statement in the text
of federal law.” Fifth Third Bank ex rel. Trust Officer v. CSX
Corp., 415 F.3d 741, 745 (7th Cir. 2005). When interpreting am-
biguous statutes, courts favor the interpretation that does not
preempt state law. Patriotic Veterans, Inc. v. Indiana, 736 F.3d
1041, 1046 (7th Cir. 2013).
The 2018 Farm Law provides that “[n]o State … shall pro-
hibit the transportation or shipment of hemp or hemp prod-
ucts produced in accordance with subtitle G of the Agricul-
tural Marketing Act of 1946 … through the State.” Pub. L. 115-
334, § 10114 (codified at 7 U.S.C. § 1639o note). At the same
time, the Farm Law expressly authorizes the states to continue
to regulate hemp production, by stating that nothing
preempts any state law regulating hemp production, even if
it is “more stringent” than federal law. Pub. L. 115-334,
§ 10113 (codified at 7 U.S.C. § 1639p). The 2018 Law says noth-
ing about whether a state may prohibit possession or sale of
industrial hemp.
The district court concluded, and C.Y. Wholesale argues
on appeal, that the express preemption clause broadly pre-
cludes Indiana from prohibiting the possession, manufacture,
and delivery of smokable hemp. Because one cannot transport
hemp without possessing it, the court reasoned, the chal-
lenged provision of Act 516 necessarily prohibits the trans-
portation of certain varieties of industrial hemp through Indi-
ana in violation of the Farm Law. The same is true for the “de-
livery” of smokable hemp. A driver from Ohio travelling
across Indiana to deliver smokable hemp to Illinois would vi-
olate Act 516’s prohibitions on the possession and delivery of
smokable hemp and be subject to criminal penalties. This, the
8 No. 19-3034
district court thought, would violate the Farm Law’s express
preemption clause.
As for the provision of Act 516 prohibiting the “manufac-
ture” of smokable hemp, C.Y. Wholesale argues that “manu-
facture” differs from the “production” that the Farm Law
leaves the states free to regulate. It argues that, in the agricul-
tural context, “production” refers only to the growing of
crops. “Manufacture,” in C.Y. Wholesale’s view, refers to the
act of converting raw hemp into a smokable product. The
Farm Law permits the states to regulate only production and
thus leaves manufacture under the federal regime.
Indiana argues that the Farm Law does not expressly
preempt Act 516, because the Farm Law expressly permits the
states to continue to regulate hemp production. Even if man-
ufacture differs from production, Indiana points out that the
Law is silent on the question whether states are authorized to
prohibit the manufacture of smokable hemp. Silence, it urges,
does not give rise to express preemption. Moreover, Indiana
points out that the Farm Law does not address possession at
all. Once again, it contends that this omission reveals that
Congress has not expressly preempted Act 516’s prohibition
on possession of smokable hemp. Indiana finally argues that
one can transport smokable hemp through the state without
violating its prohibition on possession of smokable hemp.
This argument requires drawing a distinction between pos-
session of something and “moving it around.” Even a driver
travelling through Indiana with a load of smokable hemp in
the vehicle would, on this view, not be “in possession” of the
hemp.
We are not persuaded by the last argument: hundreds of
criminal cases under federal laws prohibiting possession of
No. 19-3034 9
controlled substances, or possession with intent to distribute,
have involved highway stops of loaded trucks. A defense that
“I was just moving the heroin around” would have been
laughed out of court. But that point to one side, we conclude
that the district court read the Farm Law’s express preemp-
tion clause too broadly. The Farm Law authorizes the states
to continue to regulate the production of hemp, and its ex-
press preemption clause places no limitations on a state’s
right to prohibit the cultivation or production of industrial
hemp. Thus, the part of Act 516 prohibiting the manufacture
of smokable hemp does not fall within the ambit of the Farm
Law’s express preemption clause. We are also unconvinced
that the express preemption clause, standing alone, precludes
a state from prohibiting the possession and sale of industrial
hemp within the state. What it unequivocally does cover is the
interstate transportation of smokable hemp. This means that
a more limited injunction of Act 516 that addresses only
transit through the state, along with ancillary restrictions on
the possession and delivery of smokable hemp to the extent
that those provisions interfere with that transit, is the most
that would have been warranted on express preemption
grounds.
B
C.Y. Wholesale has not, however, put all of its eggs in the
express preemption basket. It also argues that the Farm Law
preempts Act 516 through conflict preemption. In order to
show conflict preemption, a plaintiff “must show either that
it would be ‘impossible’ … to comply with both state and fed-
eral law or that state law … constitutes an ‘obstacle’ to satis-
fying the purposes and objectives of Congress.” Nelson v.
Great Lakes Educ. Loan Servs., Inc., 928 F.3d 639, 650 (7th Cir.
10 No. 19-3034
2019). A court should not find conflict preemption “unless
that was the clear and manifest purpose of Congress.” Arizona
v. United States, 567 U.S. 387, 400 (2012). The challenger must
show that applying the state law would do “major damage”
to clear and substantial federal interests. Patriotic Veterans, Inc.
v. Indiana, 736 F.3d at 1049; see also, id. at 1046 (“We ascertain
the intent of Congress, however, through a lens that presumes
that the state law has not been preempted.”).
The district court found that C.Y. Wholesale had shown
some likelihood of success on its conflict preemption argu-
ment. It held that the Farm Law showed a clear intent on the
part of Congress to legalize all forms of low-THC hemp and
that the hemp sellers had shown at least some likelihood of
succeeding in their claim that Act 516 frustrated Congress’s
purpose. The court concluded that the portions of Act 516 that
criminalize smokable hemp reach well beyond growing re-
strictions and thus do not qualify as regulations on hemp pro-
duction that come within the 2018 Farm Law’s express anti-
preemption provision.
Here, too, although there is much that is sound in the dis-
trict court’s reasoning, it does not support a complete injunc-
tion of Act 516. Although Congress may have relaxed federal
restrictions on low-THC cannabis in order to facilitate a mar-
ket for hemp, the Law indicates that the states were to remain
free to regulate industrial hemp production within their own
borders. Despite legalizing industrial hemp on the federal
level, the Farm Bill expressly permits the states to adopt rules
regarding industrial hemp production that are “more strin-
gent” than the federal rules. Pub L. 115-334 § 10113 (codified
at 7 U.S.C. § 1639p). The federal government has adopted a
similar stance towards other psychoactive drugs, such as
No. 19-3034 11
salvia, which are not scheduled by the DEA but which some
states nonetheless choose to criminalize. Congress’s silence
on these drugs does not, through conflict preemption, pre-
clude their proscription, nor does the 2018 Farm Bill’s lenience
toward industrial hemp. See Puerto Rico Dep’t of Consumer Af-
fairs v. Isla Petroleum Corp., 485 U.S. 495, 500 (1988). We see
nothing in the 2018 Farm Law that supports the inference that
Congress was demanding that states legalize industrial hemp,
apart from the specific provisions of the express preemption
clause.
C
Finally, C.Y. Wholesale argues in the alternative that Act
516 violates the Commerce Clause of the Constitution. The
Commerce Clause prohibits a state from enacting any statute
“that clearly discriminates against interstate commerce … un-
less the discrimination is demonstrably justified by a valid
factor unrelated to economic protectionism.” Fort Gratiot San-
itary Landfill Inc. v. Michigan Dep’t of Nat. Res., 504 U.S. 353, 359
(1992) (internal quotation marks omitted). The district court
dispensed with this argument in a footnote, observing only
that it found the argument “less convincing.”
Indiana argues that a law violates the Commerce Clause
only when it “discriminate[s] against interstate commerce, ei-
ther expressly or in practical effect.” Park Pet Shop, Inc. v. City
of Chicago, 872 F.3d 495, 501 (7th Cir. 2017). The state contends
that because Act 516 applies equally to all smokable hemp,
whether produced inside or outside of Indiana, it does not
discriminate between states and thus does not violate the
Commerce Clause. C.Y. Wholesale, in response, relies upon
Kassel v. Consolidated Freightways Corporation of Delaware, 450
U.S. 662 (1981), where the Supreme Court struck down an
12 No. 19-3034
Iowa law precluding trucks from pulling 65-foot trailers on
the state’s highways on the ground that the law “substantially
burden[ed] the interstate flow of goods by truck.” Id. at 671.
According to C.Y. Wholesale, Act 516 burdens interstate com-
merce in the same way, by precluding a major industry from
shipping its goods through the state by truck. As the district
court held, this argument does not show sufficient promise of
success on the merits to warrant a preliminary injunction.
Further, this argument adds nothing of substance to C.Y.
Wholesale’s express preemption theory.
IV
Although we find that the district court’s injunction was
too broad, we should not be misunderstood as saying that a
properly tailored injunction is not warranted. It may well be
that Indiana, in proscribing the possession of industrial hemp,
has illegally prohibited the transportation of interstate ship-
ments of industrial hemp. Should that be the case, the district
court may appropriately issue an injunction preventing Indi-
ana from enforcing its law against those transporting smoka-
ble hemp through Indiana in interstate commerce. A state
cannot evade the Farm Law’s express preemption of laws pro-
hibiting the interstate transportation of industrial hemp by
criminalizing its possession and delivery. On remand, the dis-
trict court should evaluate whether Indiana’s law violates the
express preemption clause of the Farm Bill while keeping in
mind the extent to which the Law reserves to the states the
authority to regulate the production of industrial hemp.
Finally, we say a few words about Act 335, which Indiana
passed after the district court enjoined the provisions of Act
516 at issue here. Act 335 modifies Act 516 to elaborate on the
prohibition on possession and delivery of smokable hemp, in
No. 19-3034 13
a way consistent with Indiana’s briefs in this court. Act 335
clarifies that Indiana’s prohibition on the delivery and posses-
sion of smokable hemp does not apply to shipments from pro-
ducers in other states that simply pass through Indiana. How-
ever, Act 335 still permits only shipments of smokable hemp
through Indiana “from a licensed producer in another state …
to a licensed handler in any state.” We leave for the district
court to decide whether this language violates the Farm Bill’s
express preemption clause, given that the Farm Bill places no
such licensing limitation on the freedom to transport indus-
trial hemp through states that regulate or prohibit its produc-
tion.
One final point is worth noting. When this litigation be-
gan, the Midwest Hemp Council, an Indiana-based advocacy
group for the hemp industry, was a party to this case. It has
since dropped out of the litigation. On remand, the district
court should take care to ensure that the remaining plaintiffs
have standing to challenge the licensing provision. All plain-
tiffs at this point are Indiana based hemp sellers and whole-
salers. They were affected by the broader injunction, but they
may not be the right parties to challenge Indiana’s require-
ment that businesses seeking to transport smokable hemp
through the state be licensed in the states in which they do
business.
V
Because the district court’s injunction swept too broadly,
we REVERSE the decision of the district court and REMAND for
proceedings consistent with this opinion.