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November 11, 2022 – Last month, President Joe Biden announced that he was asking the Secretary of Health and Human Services and the Attorney General to “expeditiously” review the scheduling of cannabis under federal law. This is not the first call to action to move cannabis from Schedule I of the Controlled Substances Act of 1970 (CSA), a designation that also applies to heroin and LSD, to Schedule II.
More than three years ago, the 2nd U.S. Circuit Court of Appeals ordered the Drug Enforcement Administration (DEA), which administers the scheduling of drugs under CSA, to expeditiously review the drug’s classification through its internal administrative process in Washington v. Barr, (Docket No. 18-859-cv (2d Cir. May 30, 2019)).
Indeed, reclassification efforts date back almost to the passage of the CSA itself, when the National Organization for the Reform of Marijuana Laws filed a petition with the DEA’s predecessor challenging the classification in 1972.
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While it remains to be seen whether the president’s pre-midterm election pronouncement will have greater effect than the 2nd Circuit’s direction, it is useful to review what rescheduling might look like for the industry. It may very well be that it opens Pandora’s box with respect to federal regulation that comes into conflict with business models that have evolved across multiple states.
What it means to be on Schedule I
Notwithstanding the prevailing consensus of the medical community, as far as U.S. federal law is concerned, marijuana’s classification as a Schedule I drug means that it (a) has a high potential for abuse, (b) has no currently accepted medical use in treatment in the United States, and (c) lacks safety in use under medical supervision (unlike cocaine, which is listed as a Schedule II drug because it has accepted medical uses). This, by definition, puts federal policy at odds with the 37 states that have some sort of medical-cannabis program in place.
Because federal law forbids the possession, distribution, sale or use of marijuana — and provides no exception for medical uses — industry participants are potentially liable for (i) conspiring to manufacture and distribute marijuana, (ii) aiding and abetting the manufacture and distribution of marijuana, and (iii) acting as an accessory after the fact for the manufacture and distribution of marijuana, under 18 U.S.C. §§ 2, 3 and 371.
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While an annual congressional budget rider commonly known as the “Rohrabacher-Blumenauer Amendment” precludes the Department of Justice (DOJ) from using any appropriations to prevent states that have adopted medical cannabis legislation from implementing their laws — which the 9th U.S. Circuit Court of Appeals has interpreted to also protect industry participants — various executive agencies (including the Internal Revenue Service, the Department of the Treasury, the U.S. Customs and Border Protection Agency, and the U.S. Patent and Trademark Office) have cannabis-specific rules that make participation in the industry challenging.
This, in turn, makes capital more expensive and constricts access to services like banking and insurance. As long as cannabis remains on Schedule I, the industry will also remain siloed, adding to the costs. There are several reasons for this.
First, the federal government’s official stance — which is total prohibition — means that there is no federal-level regulation of cannabis and, instead, there are currently 37 different regulatory regimes in place (each with its own regulator and its own set of laws).
Second, because transportation of cannabis across state lines is strictly prohibited (and is indeed one of the “red lines” for federal enforcement), economies of scale don’t come into play, and even so-called Multi-State Operators (MSOs) must grow cannabis in the same state they sell it in. Obviously, the growing season is different in states like Arizona and Illinois.
Finally, many states have enacted laws that contain an element of protectionism, sometimes prohibiting out-of-state operators from competing for licenses. As we have previously written, such laws have been successfully challenged on Dormant Commerce Clause grounds, but nevertheless protectionism persists.
What reclassification to Schedule II might mean
What the industry might look like post-reclassification is largely a guessing game, but some parallels can be drawn between reclassified cannabis and the hemp-derived CBD industry. By way of background, the 2018 Farm Bill legalized hemp (which is a non-intoxicating form of cannabis), allowing for its cultivation and transportation across state lines.
This, in turn, gave birth to the CBD industry we know today, as the farm bill also de-scheduled hemp-derived compounds (like CBD). Almost as soon as the Farm Bill was passed, the Food and Drug Administration (FDA) stepped in to assert its authority, announcing a forthcoming rulemaking. Yet, almost four years later, the industry remains largely unregulated at the federal level (aside from occasional warning letters from the FDA regarding unfounded health claims).
There is little doubt that the FDA will assert authority over cannabis regulation if it is rescheduled to Schedule II. Indeed, it already has a landing-page for regulation of “Cannabis and Cannabis Derived Products, Including Cannabidiol (CBD).” These rules will, at least initially, co-exist with state-level regulation, and it will likely take years for those various regulatory regimes to be harmonized.
States may well resist, in the first instance, efforts to bring down the regulatory silos, especially when it comes to transportation of cannabis across state lines, because of the tax revenue they are likely to lose as a result. If rescheduling occurs without congressional action that includes preemption powers — for instance in the case of hemp legalization, Congress preempted states from enforcing laws that prohibit transportation of hemp across their state lines — this may result in drawn out litigation.
In the long term, rescheduling will increase access to (and reduce the costs of) capital, as well as expand traditional banking and lending options for industry participants. If transportation across state lines is allowed, it may well drive some farmers and producers out of business and will likely lead to industry consolidation — which would be at odds with efforts of states (like New York) to use the industry to right some of the wrongs of the war on drugs through its social equity initiatives.
While it is unlikely any of this will happen overnight, industry participants should be giving thought to these issues.
Alex Malyshev and Sarah Ganley are regular, joint contributing columnists on legal issues in the cannabis industry for Reuters Legal News and Westlaw Today.
H/T: www.reuters.com
