Biden’s Cannabis Announcement: The Reform We Need or Be Careful What You Wish For?

Key Takeaways:

  • Pardons are long overdue. States need to follow the President’s lead
  • Descheduling or Rescheduling will take time and would be subject to administrative rule making
  • While capital markets could unlock and the heavy drag of 280E could go away, descheduling or rescheduling would create huge challenges for state rules, including social equity, and could result in a wave of interstate commerce

Today, President Biden proclaimed long-delayed and earnestly welcome news: any person charged or convicted under federal law for simple possession of cannabis is pardoned and his administration must “expedititiouly review the possibility of re-scheduling or de-scheduling cannabis.” But he also opened a hell of a can of worms. On that re-scheduling/de-scheduling point, the President issued a statement that: “I am asking the Secretary of Health and Human Services and the Attorney General to initiate the administrative process to review expeditiously how marijuana is scheduled under federal law.  Federal law currently classifies marijuana in Schedule I of the Controlled Substances Act, the classification meant for the most dangerous substances.”

First, Biden’s proclamation today is decades overdue from a U.S. President and long overdue from this President who, until today, has not made good on his campaign promise to free wrongfully charged and convicted victims of the War on Drugs. All the more so because this “War” was prosecuted so disproportionately against minorities. The human toll and collateral consequences of a cannabis arrest, charge or conviction are immense. It starts at the top, and states must follow the President’s lead.

Second, for those of us working in cannabis it’s no secret that public company stocks are bruised, equity markets are dry, and fear is reigning. The implications of re-scheduling or de-scheduling are already felt in the markets, where cannabis stocks are up roughly 30% since the announcement. The most immediate outcome if cannabis were re-scheduled to Schedule III or below would be that like every other business, cannabis businesses could claim business deductions and lower their tax burden. The anvil on the industry is so-called “280E” (26 U.S. Code § 280E) which disallows any “deduction or credit . . . for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act).” Other important effects could be major U.S. stock exchanges allowing cannabis companies to list under their rules (opening a flood of new capital), and liberalizing restrictions on medical research on the therapeutic benefits of cannabis.

What comes next, though, is really challenging. Re-scheduling would still render cannabis illegal, but subject to lesser restrictions (such as recognizing medicinal purposes and allowing the substances to be dispensed through a prescription). De-scheduling would remove it from the Controlled Substances Act entirely, thus making it legal. De-scheduling appears unlikely. After all, Congress delegated re-scheduling and de-scheduling authority to the Attorney General, who has delegated it to the Drug Enforcement Administration (DEA). We envision the DEA to be hard-pressed to rush to fully legalize cannabis. Regardless, the process must be enacted by administrative rulemaking, a lengthy procedure subject to notice and comment – and one that often remains unfinished before there is a change in administrations.

If cannabis were de-scheduled, the implications would be extraordinary. Like CBD, cannabis would immediately show up in your local gas station without testing, track and trace, child safe packaging, taxation, or any licensing or registration regulations.

Re-scheduling presents a more interesting scenario. Pathways for FDA approval of cannabis drugs or products will open up, but that won’t displace state markets. It’s hard to envision a scenario where all state products will be cleared from the market by the Feds in a massive national dragnet, while the FDA explores clinical trials for drugs, dietary supplements and other products containing cannabis. Not likely to happen. State-legal, licensed cannabis businesses employ hundreds of thousands, generate significant revenue for states, and are strictly regulated under comprehensive state laws. Plus, the Feds have not engaged in much, if any, enforcement activity of state-legal, licensed cannabis businesses while cannabis is still a Schedule I controlled substance; why would they start when the schedule is lower?

Re-scheduling also would not immediately create federal authorization for interstate commerce in cannabis. Cannabis would still be a controlled substance, illegal except under certain restrictions such as through a prescription and only then, after FDA approval. But it would make all state laws that require all cannabis sold in state to be produced in state more susceptible to legal challenge under the Dormant Commerce Clause to the U.S. Constitution. Those battles would, however, play out piecemeal. State-by-state, circuit-by-circuit, law-by-law, state laws could fall to commerce clause challenges (as has recently happened to Maine’s residency restriction in the U.S. Court of Appeals for the First Circuit), until eventually the U.S. Supreme does – or does not – issue a ruling. Vulnerable to challenge would be rules that are patently violative of the Commerce Clause (residency restrictions and sadly, a variation of residency restrictions, which are social equity licensing reservations for residents living in disproportionately impacted areas of a state), the hard cases such as rules requiring in-state production, testing, and sale, and the open questions, like state-specific testing, labeling, potency, and other standards.

For this reason, most major trade groups believe cannabis will most safely and effectively be legalized through comprehensive legislation that defines permissible areas of state regulation, phases in interstate commerce once uniform national regulations and standards are passed, and preserves social equity mandates.

While the markets may love today’s news on the potential for executive branch re-scheduling/de-scheduling, it could be a case of be careful what you wish for.

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