While the cannabis industry is closely following the recently published notice of proposed rulemaking from the Department of Justice (“DOJ”) and the Drug Enforcement Administration (“DEA”), which will move cannabis from a Schedule 1 controlled substance to a Schedule 3 controlled substance under the Controlled Substance Act (“CSA”), a very important federal cannabis litigation matter is making its way through federal court. That case is Canna Provisions, Inc., Gyasi Sellers, Wisacre Farm, Inc., and Verano Holdings Corp.v. Merrick Garland, case no. 23-cv-30113. Filed in October of last year, the Canna Provisions case is more important than ever in the context of rescheduling (in my opinion) and this post serves as an update on what’s happening in court.
History of the Case: Plaintiffs’ Claims
In October of last year, several large cannabis companies (and the CEO of Treevit) filed suit against our current U.S. Attorney General, Merrick Garland, alleging that, while Congress has the constitutional power to ban cannabis from interstate commerce (which will still be the case even with Schedule 3), the CSA exceeds that power by overreaching to ban cannabis from purely intrastate commerce. Essentially, neither the Commerce Clause nor the Necessary and Proper Clause of the Constitution give Congress a “general police power” to take over regulation of strictly intrastate commerce. Plaintiffs allege significant harm done to their businesses due to the current status of federal law, including the application of IRC 280E, lack of bankruptcy, and lack of access to banking (among others). In this cannabis litigation, plaintiffs asked the Massachusetts federal court for a declaratory judgment that the CSA is unconstitutional as applied to intrastate commercial cannabis activity (both adult use and medicinal) and for a permanent injunction against Garland (and the DOJ) from enforcing the CSA in a manner that interferes with intrastate commercial cannabis activity.
Interstate vs. Intrastate Commerce Cannabis Litigation
Plaintiffs’ complaint also addressed the precedent set by the 2004 case of Gonzalez v. Raich in which California medical cannabis patients challenged the constitutionality of the CSA as applied to purely intrastate medical cannabis activities. In that case, the U.S. Supreme Court (“SCOTUS”) ruled that the Commerce Clause gave Congress authority to prohibit the local cultivation and use of cannabis despite state law to the contrary where such activities, in the majority opinion of SCOTUS, are part of a “class of activities” with a substantial effect on interstate commerce. To distinguish Raich, the Canna Provisions plaintiffs claim that today’s state-legal cannabis market is wildly different and more controlled than it was during the Raich case. Namely, that these highly regulated state markets serve to reduce the illicit movement of cannabis in interstate commerce; cannabis isn’t fungible (like wheat) since it’s now uniquely produced by a variety of companies that also track, trace, package, label and test it before it hits the marketplace (as compared with illegal cannabis); and the DOJ is checked out an enforcement anyway because the states are adequately controlling and enforcing against state-licensed cannabis businesses accordingly.
DOJ Moves to Dismiss, Plaintiffs Respond, DOJ Replies, and Oral Arguments go Down
In January of this year, the DOJ moved to dismiss the case. Among multiple arguments against plaintiffs’ claims in its 25-page memorandum in support of the dismissal, the DOJ mainly argued that plaintiffs haven’t really suffered any actionable, direct harm due to the current status of cannabis as a Schedule 1 illegal drug under the CSA (which the DOJ claims is highlighted by the fact that it’s stood down on enforcement over the years) and, therefore, plaintiffs lack standing to bring the case. The DOJ also argued that plaintiffs’ suit is just a naked attempt to overturn Raich, which only SCOTUS can do. And regarding any alleged violations of due process, the DOJ batted back that there are no due process rights at issue since courts have long recognized that there is no fundamental right to engage in commercial cannabis activity.
Plaintiffs’ filed a response brief in March of this year, countering the DOJ’s points of law and procedure by emphasizing the allegations in the original complaint, hitting home how different the state-regulated cannabis industry is now compared to 2004/2005.
As is procedurally customary, the DOJ then filed a reply brief in April, stating again that plaintiffs lack standing here because there is no threat of enforcement of the CSA by the DOJ anyway and that plaintiffs are not under any realistic threat of prosecution. The DOJ essentially regurgitated its arguments from its motion to dismiss, adding that the goal of the government to end illicit interstate cannabis commerce is a legitimate end and that Congress need only have a rational basis to sustain that end (without any higher standard of scrutiny from the court in reviewing its actions).
Oral arguments were heard on the DOJ’s motion to dismiss on May 22, and now we wait to see how the federal court rules. Interestingly, during the hearing, the federal judge seemed very interested in how rescheduling cannabis impacts the case.
This Particular Federal Cannabis Litigation and Schedule 3
Both plaintiffs and the DOJ seem to agree about the impact of Schedule 3 on the Canna Provisions case, but for maybe slightly different reasons. Both camps claimed in oral argument that Schedule 3 won’t have any impact on the case. Why? The DOJ’s position is that Schedule 3 hasn’t occurred yet and the case still has to make its way through the courts as a result, but that even if cannabis is rescheduled, nothing changes legally for state-licensed cannabis businesses (meaning, they’re still federally illegal and the DOJ still has the ability to enforce accordingly under the Commerce Clause and other federal laws and rules that are allegedly “rational” and legitimately executed). The plaintiffs also stated in the hearing that Schedule 3 has no bearing on the case, agreeing with the DOJ that nothing changes for state-licensed cannabis businesses because they’re still in danger of unconstitutional federal enforcement under the CSA as a result. The DOJ also took a curious position that Schedule 3 may make financial institutions more likely to do business with state-licensed cannabis businesses, but I personally don’t see this as the case as those businesses will remain federally illegal and financial institutions are notoriously conservative animals (plus, we’d need a new FinCEN memo in support of such a move).
Reading Between the Lines
The DEA specifically pointed out in its notice of proposed rulemaking that Schedule 3 controls will be in action for cannabis in the event it’s rescheduled (i.e., DEA registrations, FDA drug approval process, prescriptions, pharmacies, etc. in order to make and access cannabis-derived drugs). A large portion of the cannabis industry though sternly believes on the whole that if the DEA failed to enforce the CSA when cannabis was a Schedule 1 drug, it will look the other way, too, with cannabis as a Schedule 3 drug (and that the Food and Drug Administration will, too). The plaintiffs in Canna Provisions though made the ultimate point that Schedule 3 does nothing to legalize these state-licensed cannabis businesses and the law is the law; (while IRC 280E will no longer apply, which is huge) the threat of enforcement is in fact still there from DOJ and the federal government even if they choose not to exercise it consistently. And unless Garland issues some kind of “Cole Memo 3.0” in the interim, the Canna Provisions lawsuit is still incredibly important to creating some kind of legal precedent for the protection of, and carve out for, state-legal cannabis businesses, including from Schedule 3 controls which should otherwise apply in the rescheduling context.
I’ll be eagerly watching this cannabis litigation progress, and while there’s no immediate impact on the case from cannabis rescheduling, I sincerely think the long-term protections for state-legal businesses that could arise are significant.
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