Interstate Cannabis Commerce on the Horizon Thanks to California

Despite the proliferation of in-state cannabis businesses and commerce, the sale and transportation of marijuana between and among states, even states with legal cannabis frameworks, remains federally prohibited due to the classification of marijuana as a Schedule 1 drug under the Controlled Substances Act. This has led to some of the oversupply and price decrease challenges businesses have been grappling with in Oregon, California, and Colorado as well as has, in some ways, supported the illicit market as over-taxed and over-regulated licensed businesses struggle to turn a profit.

Recognizing the regulatory barriers and financial constraints afflicting legitimate cannabis businesses, California’s Governor Gavin Newsom signed Senate Bill 1326 into law in late 2022, which introduced a process for California to enter into agreements with other states to allow for interstate cannabis transactions. Pursuant to the new law, California may enter into an agreement with another state that allows for medicinal or adult-use cannabis, which would then allow licensed entities in both contracting states to enter into contracts for the import, export, distribution, and transportation of cannabis products (flower, bulk oil, finished products, etc.) from one state to the other, and vice-versa. With respect to the interstate transportation of cannabis or cannabis products, however, contracting parties would be prohibited from

(1) transporting cannabis by any means other than those authorized under both the laws of the foreign state and the regulations of the California Department of Cannabis Control; and

(2) transporting cannabis products through the jurisdiction of a state, district, commonwealth, territory, or possession of the United States that does not authorize that transportation.

Therefore, logistics and identification of “green” routes in between distant states will be paramount.

Moreover, any such interstate agreements with California will require the contracting state participants to be bound by California requirements pertaining to public health and safety, tracking, testing, labeling, etc. This means out of state producers will need to comply with California law, including tax laws, when selling products to California operators as if they were licensed and operating in California. Looking to control how its products are sold or marketed in other states, California will require any receiving state to have cannabis advertising, marketing, and labeling restrictions that meet or exceed those in California.

But before any lawyers can get to work trying to paper any such import/export agreements (which can only happen after the governors of the participating states enter into a cannabis commerce agreement), one of four things needs to happen:

(1) the federal law is amended to allow for interstate cannabis commerce;

(2) a federal law is enacted proscribing the use of federal funds to prosecute or prevent the interstate transfer of cannabis;

(3) the Department of Justice issues an opinion tolerating the interstate transfer of cannabis; or

(4) the California Attorney General issues a written opinion that implementation of interstate cannabis agreements will not result in “significant legal risk” to the State of California.

The California Department of Cannabis Control (“CDCC”) has opted for option 4 and earlier this year submitted a request for a written opinion from the Attorney General on the matter. In requesting an opinion on whether “state-law authorization for medicinal or adult-use commercial cannabis activity, or both, between out-of-state licensees and California licensees, under an agreement pursuant to SB 1326, will result in significant legal risk to the State of California under the federal Controlled Substances Act,” the CDCC provided several reasons why it believed it would not.

The CDCC posited that the anti-commandeering rule in the U.S. Constitution “protects California from liability, under federal law, for choosing to legalize and regulate commercial cannabis activity as a matter of its own state laws” and the “Controlled Substances Act could not constitutionally prohibit California from legalizing and regulating commercial cannabis activity as a matter of state law, including commercial cannabis activity involving out-of-state licensees.” The CDCC further argued because the Controlled Substances Act indiscriminately “shields state officials from liability in connection with their enforcement of state law,” California and its officials would be immune from prosecution for enforcing state laws pertaining to controlled substances such as marijuana. Finally, the CDCC pointed out that the appropriations rider attached to federal spending bills “expressly forbids the U.S. Department of Justice from expending funds to interfere with states’ implementation of their medicinal-cannabis laws.”

Therefore, the CDCC asked the Attorney General to confirm its conclusion that by entering into and implementing interstate cannabis import/export agreements, California would not be at a significant legal risk with respect to the Controlled Substances Act. Whether the Attorney General shares that conclusion and is willing to memorialize it in a formal opinion remains to be seen. In any case, California has made commendable strides toward a commercially viable interstate cannabis market, an effort shared by other states such as Oregon, Washington, and New Jersey which are all in different stages of enacting similar laws.

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