Author
In a historic move, the DEA accepted the US Department of Health and Human Services’ recommendation to reclassify marijuana from Schedule I to a Schedule III controlled substance, arguably the most significant change to federal drug policy in nearly fifty years. This move would place marijuana amongst the likes of other Schedule III controlled substances such as acetaminophen with codeine, ketamine, and testosterone and remove it from the class of Schedule I drugs that included heroin, LSD, and ecstasy.
While this proposal does not completely legalize marijuana at the federal level (possession of and/or selling cannabis still remains illegal on the federal level), it now classifies marijuana as having a currently accepted medical use and a relatively low potential for abuse. This proposal does not change any state marijuana laws in the 24 states, two territories, and Washington D.C. that legalized cannabis for adult recreational use, or the 38 states that allow the medical use of cannabis products. However, the change would result in significant tax breaks for companies that grow and sell marijuana under the Internal Revenue Code. Currently, businesses that sell Schedule I substances cannot deduct business expenses pursuant to Section 280E of the Internal Revenue Code. However, with the reclassification, business would be eligible for significant tax breaks, saving businesses hundreds of thousands, if not millions, of dollars in excessive taxes.
The reclassification could also provide the path for cannabis companies to be listed on major stock exchanges, providing investment capital that could stimulate further growth.
The decision to reclassify cannabis has no bearing on the legal issues that surround the banking industry. Under the current regulatory status, those engaged in the sale and distribution of cannabis on a state level are prevented from using deposit accounts, insurance and other financial services similar to the way that other businesses operate. Indeed, despite the reclassification, cannabis still remains illegal under federal law, leaving many growers and sellers without financial services such as operating bank accounts or maintaining credit cards. Many cannabis businesses are forced to operate in cash only as most banks are unwilling to deal with money from cannabis businesses out of fear it could expose them to legal trouble.
Further, the reclassification still does not resolve the conflict between state and federal medical and adult-use cannabis laws. This proposal would not change any of the state marijuana legalization laws. Indeed, this reclassification would not impact any of the state employment laws that are often at issue with marijuana use. For example, while Michigan has legalized recreational use of marijuana, an employer does not have to permit or accommodate recreational marijuana use in the workplace or on the employer’s property. In Michigan, an employer can refuse to hire or discharge a person because of that person’s violation of a workplace drug policy. The reclassification of marijuana to Schedule III would not impact any of these state specific employment laws, though the shift from the federal government may persuade individual employers to change their policies.
The reclassification of marijuana from Schedule I to Schedule III also raises potential regulatory concerns. The scope and demand of FDA oversight for medical marijuana and related products may grow considerably. Under a Schedule III regime, substances generally require FDA approval, thus raising a potential that cannabis may no longer be able to be sold through dispensaries as regulatory agencies have defined “medical use” in the United States narrowly. This reclassification should necessitate a review by companies of existing compliance protocols for cannabis-related businesses. Regulatory changes would be expected to be instituted affecting licensing and distribution.
The reclassification also does not resolve the lack of bankruptcy as an option for cannabis businesses and the protection of a “fresh start” available to other businesses. Currently, cannabis companies are not entitled to federal bankruptcy protection since Section 1129 of the US Bankruptcy Code requires that bankruptcy plans are “not by any means forbidden by law.” State regulated cannabis companies technically violate the Controlled Substances Act and rescheduling cannabis to a Schedule III does not resolve this issue. Indeed, as long as cannabis use remains illegal at the federal level, regardless of the Schedule that it falls into, cannabis businesses remain unable to satisfy the requirement for bankruptcy reorganization under the Bankruptcy Code.
Further, the reclassification does not resolve the lack of availability of federal trademark registrations for state cannabis companies. Currently, federal trademark registrations are not available for state-cannabis companies due to the illegal status of cannabis at the federal level. As the rescheduling of cannabis from Schedule I to Schedule III has no impact on the federal legality of cannabis, state-cannabis companies still remain without access to federal trademark protection. However, this reclassification raises the stakes of potential trademark infringement in the future. Indeed, as cannabis becomes more prominent and regulation efforts on the local, state, and federal level head towards varying levels of legalization, history shows that trademark infringement lawsuits will grow increasingly common.
Prohibition provides the prime example. Once alcohol was de-prohibited, alcohol companies were able to register for nationwide trademark rights. This led to an influx of trademark litigation based on pre-existing trademarked, non-alcohol companies that alleged they had priority to the trademarked name. For example, in James Burrough Ltd. v. Sign of Beefeater, Inc., 540 F.2d 266 (7th Cir. 1976), Burrough was the owner of three trademark registrations for gin, each alleging first use on November 9, 1909. The registrations were for the term “Beefeater.” A restaurant operation in Detroit, Michigan commenced its operation with the notation “Sign of the Beefeater” for their restaurant. The Seventh Circuit concluded that the federal mark for “Beefeater,” had priority based on its first use in 1909. While cannabis still remains illegal at the federal level, the reclassification signals a growing recognition of cannabis companies and the future potential of increased trademark litigation.
Any reclassification still remains months from taking effect. The proposal must be reviewed by the White House’s Office of Management and Budget. If the proposal is accepted, it then gets published in the Federal Register and a 60-day public comment period begins. The proposal is then reviewed by an Administrative Law Judge who may hold a hearing on the proposal. The final rule will then be published, officially enacting the reclassification.
For more information on how best to take advantage of this change, please contact us at Clark Hill. Our Cannabis Industry Group team of attorneys stand prepared to represent your legal interests in the cannabis industry.
This publication is intended for general informational purposes only and does not constitute legal advice or a solicitation to provide legal services. The information in this publication is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this information without seeking professional legal counsel. The views and opinions expressed herein represent those of the individual author only and are not necessarily the views of Clark Hill PLC. Although we attempt to ensure that postings on our website are complete, accurate, and up to date, we assume no responsibility for their completeness, accuracy, or timeliness.
