Major Step in Federal Cannabis Policy Reform – The Proposed Rescheduling (But not De-scheduling) of Marijuana

Article by: Radhi ShahJanet Jackim, and Tom Zuber

Summary
In a groundbreaking development on August 29, 2023, the United States Department of Health and Human Services (HHS) recently concluded that, based upon its research into medical responses to the use of marijuana, scientific research evidence, and medical evaluations, it should not be a Schedule I drug under the federal Controlled Substances Act (CSA) (i.e., one with no accepted medical use and a high potential for abuse such as heroin, LSD, and ecstasy) but, rather, be reclassified  to a Schedule III drug on a par with drugs such as Tylenol with codeine, ketamine, anabolic steroids, and testosterone. HHS recently made this recommendation  to the Drug Enforcement Administration (DEA) as part of the Biden administration’s efforts, commenced in October 2022, to reconsider federal law on marijuana. This significant policy shift  marks a pivotal moment in the reform of marijuana policies and is being heralded as the most significant change in over half a century.
The speed at which this recommendation was reached is noteworthy, completing the administrative process in less than 11 months. This efficiency is attributed to the collaborative efforts and leadership within the HHS. The DEA, having received the recommendation, now holds the authority to proceed with its own review.
However, it’s important to note that while the HHS rescheduling recommendation holds great promise, several steps remain before tangible changes may occur to marijuana’s reclassification. The HHS recommendation was triggered by a review by the DEA, conducted by the U.S. Federal Drug Administration (FDA), the National Institute on Drug Abuse, and the Department of Justice, each of whom will be involved in attaining a final decision on marijuana’s classification at the federal level. The DEA is not required to follow HHS’ recommendation!  Expect the U.S. Congress and House of Representatives to weigh in, too. Us ordinary citizens will likely have one or more opportunities to voice our opinions during the public comment period(s). And, perhaps more specifically, you should expect various pro- and anti-cannabis organizations and individuals to initiate litigation in state and federal courts, potentially delaying any reclassification. Oh, don’t forget that federal regulations will likely need to be posited and vetted, resulting in delays.  Your Zuber Lawler team will be there to keep you apprised of developments as they occur.
Market Response
Investors in the marijuana industry have eagerly welcomed this announcement, leading to a surge of approximately 20% in the heavily-depressed stock prices of exchange-listed U.S. cannabis companies. Legal experts and industry insiders are calling this a historic milestone in federal-level cannabis reform, and they are gearing up for new work on client expansion plans, rejuvenated investment community interest in the marijuana marketplace, and disgruntled stockholders who are looking furtively at positive developments in cannabis. 
Other Implications
Rescheduling marijuana has wide-ranging implications beyond the marijuana marketplace, and here are a few we see today:
  • The Practice of Medicine.  In I medical domain, expect doctors and their professional organizations to question not only the efficacy but also the need for marijuana to replace long-approved and used pharmacological remedies, asking why should the U.S. stop using pharmaceutical products when they work? 
  • Taxation.  For federal and many state taxation systems, a rescheduling could result in a considerable reduction in steep taxes currently imposed upon marijuana companies. Most importantly, IRS Code Section 280E, which prohibits an illegal enterprise doing business in Schedule I products (that is, a cannabis business) from deducting otherwise ordinary business expenses from its gross income (adopted by many states for their own taxation systems), could be discontinued, providing a windfall in profits to such businesses.  However, states that currently impose 280E prohibitions will likely see a huge drop in tax collections from cannabis businesses; some of these states rely upon marijuana taxes to fund community and educational programs and otherwise prop up their state’s budget.
  • Banking.  As a positive to everyone other than financial institutions already in this space, a shift to Schedule III classification would likely encourage traditional financial institutions to enter the now-small world of cannabis bankers providing banking, loan, and treasury services to cannabis businesses, alleviating the latter’s long-standing reliance conducting business in cash.  We might actually see JPMorgan Chase or Bank of America prospecting for business at the MJBizCon and other industry conferences!  Loans made under Schedule I parameters will likely require revisiting and revising, resulting in less onerous loan compliance provisions enforceable against marijuana business borrowers, but potentially expanding loan maximums, loan uses, and interstate loan capabilities.
  • Professional Services.  Numerous businesses plying their trades in the state-legal marketplaces may run out of business if marijuana is rescheduled to a Schedule III classification.  Attorneys, accountants, and consultants may lose clientele who no longer face criminal prosecution or civil litigation based upon marijuana illegality. Real estate brokers may not needed to locate cannabis businesses in extremely limited and highly regulated cannabis zones and facilities.  Will there continue to be a “marijuana premium” (sometimes as high as 30% above the market value of non-cannabis real estate) tied to a user’s occupation of a retail, manufacturing, or cultivation facility?
  • Interstate Commerce.  If interstate commerce would now be available to marijuana companies on the rescheduling of marijuana, how will that opportunity comport with state and local jurisdictional prohibitions upon interstate commerce in marijuana?  One has to wonder whether some of the states will aggressively proceed in permitting interstate commerce so as to gather additional tax revenue from out-of-staters (both individuals and companies).
  • State Cannabis Programs.  State programs regulating marijuana vary wildly from state to state.  Remember, these medical and/or adult use (recreational) programs, statutes, regulations, and case holdings would have been adopted prior to the rescheduling of Schedule I marijuana.  Undoubtedly, such rescheduling would throw state, county, and local jurisdictional law into a frenzy given the substantially different circumstances under which they were made. For example, if a drug store may provide Tylenol with codeine to prescription customers, would it also be permitted to provide marijuana to customers? Would state, county, and local jurisdictions be required to modify via ordinance or other authority all of their cannabis laws?  Does rescheduling open up many more locations for the distribution of cannabis?  Similarly, state regulatory authorities may, as a result of rescheduling, lose their jurisdiction over cannabis businesses formerly regulated in deference to the CSA.  And licensees, who spent millions of dollars gearing up their operations to comply with state and local jurisdictions’ specific regulatory requirements, may no longer need to comply; nor would their competition, unimpeded by such regulatory requirements which would have evaporated upon the rescheduling of marijuana.  We’ve got to believe that the multi-state operators, and their lobbyists, are scrambling to determine how a rescheduling will affect their competition.
  • International Cannabis Programs. Canada, Uruguay, and Mexico have been feted for their early adoption of medicinal cannabis programs, although each has had its own unique history concerning adoption, regulation, and use.  By rescheduling marijuana, federal agencies will need to deal with various international treaties and understandings classifying marijuana as a controlled substance and thereby limiting its legal availability.  A considerable concern, however, is whether rescheduling marijuana will encourage other countries on the edge of various forms of legalization to flip to de-regulation of some sort.
Conclusion
Although no fixed timeline for DEA’s response exists, many experts anticipate a recommendation before the upcoming presidential election. Given the swiftness of the HHS review, an even earlier recommendation by the DEA is plausible. This would initiate a federal rulemaking process, though broader reforms would be essential for legal interstate and international trade of cannabis products.
Industry reactions have been overwhelmingly positive, with shares of listed multistate cannabis operators experiencing significant gains. The potential elimination of Internal Revenue Code Section 280E, which prevents standard business deductions for marijuana companies, has been a driving factor in these reactions.
Moreover, this development could alleviate the stagnation of key legislative efforts in Congress. Measures like federal legalization and banking protections, exemplified by the SAFE Banking Act, have faced challenges in advancing through Congress to the President’s desk. Senator Ron Wyden, an advocate for these reforms, emphasizes the importance of comprehensive federal regulations to safeguard public health and safety.
While the HHS recommendation holds remarkable implications, some legislators believe it is just one step in the right direction. U.S. Rep. Earl Blumenauer, Chair of the House Cannabis Caucus, stresses that further reforms are necessary to address the broader complexities of cannabis policy and, ultimately, in de-scheduling marijuana.
In sum, the HHS’ recommendation to reschedule marijuana to a less restrictive category is a watershed moment that could transform the landscape of marijuana policy and industry practices in the United States. As the review process unfolds, industry stakeholders and policy advocates, including the Zuber Lawler team, are closely watching for the next steps in this historic journey.
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Radhi Shah

Law Clerk, Zuber Lawler

 

Radhi Shah focuses on commercial, employment, and patent litigation, as well as patent prosecution. Ms. Shah developed her legal acumen at various international law firms, often representing clients in relation to computer technologies and the health care sector.  She has worked with a wide range of technologies, biotechnology, life science, medical devices, legalized cannabis, and legalized psychedelics. As an Indian Patent Attorney, Ms. Shah has worked closely with wide-ranging international clients, forging connections between U.S. and foreign entities. Ms. Shah earned her LL.M. at the USC Gould School of Law. 

 

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Janet Jackim

Partner, Zuber Lawler

 

Janet Jackim, recognized nationwide by Chambers USA, is an experienced leader for all kinds of matters related to the cannabis industry. She handled the acquisition of cannabis operations across the nation and represented clients in relation to cannabis dispensary certificate applications, buyout transactions, business restructuring and partner dispute resolution. Ms. Jackim’s clients include multistate operators, dispensaries, producers, cultivators, investors, lenders, landlords, tenants and vendors. Ms. Jackim obtained her J.D., cum laude, from Loyola University Chicago School of Law, and her B.A., with honors, from Indiana University.  

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Tom Zuber

Managing Partner, Zuber Lawler

 

Tom Zuber, recognized nationwide by Chambers USA, is the Managing Partner of Zuber Lawler. Mr. Zuber manages matters around the world, including as to deals, litigation, and intellectual property prosecution. He personally manages relationships with more than 10 of the firm’s Fortune clients, as well as funds and government entities, including the FDIC. Mr. Zuber is a leading voice in relation to a variety of emerging industries and technologies, including legalized cannabis and legalized psychedelics. Mr. Zuber is a founder of the leading international cannabis consultancy company Global Go and the leading magazine Global Cannabis Times. He has been named one of High Times “100 Most Influential People in the Cannabis Industry,” and sits on the Board of the Psychedelic Medicine Coalition. Mr. Zuber earned a J.D. degree from Columbia Law School, a master’s in public policy degree from Harvard University, and a biomedical engineering degree from Rutgers University, where he graduated with highest honors.

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