The biggest legal shift in the cannabis industry in decades just occurred on the heels of the Drug Enforcement Administration’s (DEA) proposal for cannabis rescheduling (see here for the full announcement). Specifically, as many anticipated, the DEA will exercise its authority to reschedule cannabis from a schedule I controlled substance to a schedule III controlled substance on the Controlled Substances Act (CSA). This cannabis rescheduling comes in part from the recommendation of the Department of Health and Human Services to reschedule cannabis from a I to a III on the CSA. The DEA’s proposal must now go before the White House Office of Management and Budget (OMB) for review and approval. The OMB’s primary functions relate to budget formulation and execution, legislative coordination and clearance, executive orders and proclamations, information and regulatory affairs, and mission-support areas and management initiatives. OMB will very likely review this DEA proposal for budget impact, regulatory impact, and legislative coordination.

What Happens Now?

Administrative Process for Cannabis Rescheduling–the Road is Likely Long (and Tortured)

At the end of last year, we wrote about the cannabis rescheduling process from the procedurally and technical perspective. The proposed cannabis rescheduling rule, or Notice of Proposed Rulemaking, is the official document that announces and explains the DEA’s plan to address and accomplish rescheduling. The proposed rule will be published in the Federal Register to notify the public and to give them an opportunity to submit comments. The proposed rule and the public comments received on it will form the basis of the final rule.

In general, agencies will specify a comment period ranging from 30 to 60 days, but the time period can vary. For complex rulemakings, agencies may provide for longer time periods, such as 180 days or more. Agencies may also use shorter comment periods when that can be justified. Members of the public may request that the agency allow more time to submit comments, and agencies may consider late‐filed comments, if their decision‐making schedule permits it.

During the comment period, an agency may also hold public hearings where people can make statements and submit data. Some agencies operate under laws that require rulemaking hearings. Others may hold public meetings to collect more information or to help affected groups get a better understanding of the proposed rule. After the comment period closes, an agency may establish a second period for reply comments (comments that respond to prior comments). A reply period is not required by law. The reply comment period enables people to respond to comments that agencies received at the end of comment period, creating more of a public dialog.

At the end of the rulemaking process, the agency must base its reasoning and conclusions on the rulemaking record, consisting of the comments, scientific
data, expert opinions, and facts accumulated during the pre‐rule and proposed rule stages. Obviously, this formal rulemaking process to get to a final rule can take a long time to finalize, and we have no doubt that it will be a lengthy process to secure cannabis rescheduling.

The Lawsuits to Stop or Greatly Delay Cannabis Rescheduling

Without a doubt, we’re going to see legal challenges to the DEA’s cannabis rescheduling efforts. Challenges will likely range from allegations of procedural deficiencies, the DEA exceeding its rulemaking authority, and claims that the proposed final rule is arbitrary and capricious. We anticipate that petitioners here will range from prohibitionists to those who want to see cannabis completely de-scheduled. These administrative challenges, even if unsuccessful, will also delay implementation of the final cannabis rescheduling rule.

Existing State Markets and Cannabis Rescheduling

State Regulations

Also at the end of last year, we wrote about the many outcomes stemming from a schedule III move. From the state cannabis regulatory perspective, cannabis rescheduling likely won’t change anything. These state-licensed businesses still won’t be able to move cannabis in interstate commerce, cannabis banking will remain precarious but alive in line with the 2014 FinCEN guidelines, and these businesses will remain unlawful in the eyes of the Feds. However, it is highly unlikely that state-regulated adult use and medical markets are flipped on their heads overnight by state legislative or regulatory action. Things will proceed as usual regarding state cannabis licensing, at least for a while.

The Feds

This is one of the biggest questions about what the Feds will do regarding enforcement of existing schedule III restrictions when it comes to state-licensed adult use and medical cannabis businesses. Similar to state regulators, we don’t foresee things changing for state-licensed businesses overnight, but that also all depends on how the Department of Justice (DOJ) plans to handle this seemingly legal paradox when it comes to schedule III controlled substances. Will we receive a “Garland Memo” similar to the 2013 Cole Memo to protect existing state markets? Will we receive some kind of Congressional carve out to exempt state cannabis licensees from schedule III restrictions, like having to register facilities with the DEA, pharmacy-only dispensing, and complying fully with Food and Drug Administration (FDA) regulations? The jury is out on this one.

IRC 280E

Yes, one of the biggest benefits of cannabis rescheduling is that Internal Revenue Code 280E will no longer apply to state-licensed cannabis businesses. However, that impact will not manifest unless and until the DEA adopts its final cannabis rescheduling rule. So, prepare for 280E relief to take a good amount of time.

How to Prepare Yourself for this Cannabis Reschedule

If you’re a state-licensed cannabis business, here’s how to prepare yourself for this epic change in federal cannabis laws and rules:

• You should strongly consider compiling comments to submit to the DEA during this incredibly important rulemaking process. It’s your one shot to have your voice and positions heard as this rule will impact your cannabis business for years to come.
• Task a staff member, your general counsel, or your outside legal counsel with keeping an eye on the rulemaking process and its fits and starts so that you’re apprised of where things are going with the DEA.
• Keep your head on a swivel for a new DOJ memo on state markets and enforcement in light of cannabis rescheduling (which is more likely than some kind of act from Congress).
• Realize that 280E relief is not instant. You need to continue to manage and run your cannabis business with that in mind, and investors should be mindful of this delta, too.
• You will not in any way be able to move your cannabis goods from state to state; schedule III doesn’t open up interstate commerce.
• Talk with your financial institution about what they’re planning to do on the back of cannabis rescheduling. The answer should be “not much” unless and until the 2014 FinCEN guidelines change or are updated.
• Keep your state cannabis licensing up to date and in good standing. Those state laws and regulations will still apply unless and until changed by the states.
• If you have investors, you likely have a duty to keep them apprised of what the company is doing and plans to do in light of this cannabis rescheduling. So, continue to stay educated on rulemaking and its consequences and keep lines of communication with investors wide open to ensure clarity and understanding on their part.

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