We have come a long way from the era when only criminal defense attorneys dealt with violations of cannabis laws. Today legalized cannabis is a burgeoning area of law that has many firms, large and small, trying to get a piece of the cannabis market.
For years, the conservative risk management approach for attorneys seeking to advise clients in this arena was to comply with Rule 1.2(d) of the Rules of Professional Conduct. Rule 1.2(d) prohibits counseling a client to engage in criminal activity or assisting a client in such activity, but permits a lawyer to “discuss the legal consequences of any proposed course of conduct with a client and may counsel or assist a client to make a good-faith effort to determine the validity, scope, meaning or application of the law.” Compliance was necessary due to the fact that federal law criminalized (and still does) the manufacture, distribution, or dispensing of marijuana pursuant to the Federal Controlled Substances Act, 21 USC § 846. There is no Rule of Professional Conduct that provides guidance to lawyers who are faced with a client who seeks to do something permitted by state law but prohibited under federal law.
Since then, both medical and recreational use of marijuana has been legalized in an increasing number of states and territories. This means more businesses, income, taxes, and legal advice from coast to coast. While still illegal under federal law, to date, 37 states, three territories, and the District of Columbia allow the medical use of cannabis products. 21 states, two territories, and the District of Columbia have enacted measures to permit cannabis for non‑medical adult recreational use. There are still 13 states that outlaw marijuana entirely. See the chart below for more detailed information.
Chart from the National Conference of State Legislatures (NCSL), November 9, 2022. For more detailed information by state, visit https://www.ncsl.org/research/health/state-medical-marijuana-laws.aspx.
The recent midterm elections included cannabis-related measures on the ballot in several states. Voters in Arkansas, North Dakota, and South Dakota rejected measures for recreational marijuana use, and voters approved the legalization of recreational marijuana in Maryland and Missouri. President Biden’s proclamation on October 7, 2022 included a request for the Secretary of Health and Human Services and the U.S. Attorney General “to initiate the administrative process to review expeditiously how marijuana is scheduled under federal law.”
On April 1, 2022 (no, this is not an April Fool’s joke), the Marijuana Opportunity Reinvestment and Expungement (MORE) Act was once again passed by the U.S. House of Representatives .[1] If passed by the U.S. Senate, the MORE Act would decriminalize cannabis at the federal level by removing it from the federal Controlled Substances Act,[2] criminal penalties for federal cannabis offenses would be eliminated, and past federal cannabis convictions would be expunged.
From a technical standpoint, though, the MORE Act does not legalize cannabis, which would be up to the states to decide—similar to the way alcohol is federally regulated. The federal government would impose a tax on cannabis sales starting at five percent and then increasing to eight percent over three years. Significantly, the passage of the MORE Act would open the door to research—since its illegality at the federal level means it is still technically illegal to medically research cannabis—and cannabis-related businesses would be able to use federally insured banks.[3]
The MORE Act would need 60 votes to pass in the Senate, but some have referenced the Senate’s own marijuana bill, which has yet to be considered in 2022. The Cannabis Administrative and Opportunity Act (CAOA), a bill sponsored by Senators Schumer, Booker, and Wyden, would remove marijuana from the Controlled Substances Act and allow states to determine their own cannabis laws. The first draft of the CAOA has a ten percent sales tax, increasing to 25 percent over five years, and the revenue generated would support restorative justice, public health programs, and safety research.
Now, even bankruptcy lawyers are having to navigate issues over the state-by-state legalization of cannabis. For instance, on November 10, 2022, a court-appointed receiver put the City of Chester, Pennsylvania into bankruptcy under Chapter 9. But the State of Pennsylvania has a legal medicinal cannabis program. The City of Chester, therefore, derives tax revenue from this technically federally illegal program.
The protections of the Bankruptcy Code have been universally denied to individuals and businesses that derive any portion of their income or revenue from the cannabis industry. Bankruptcy courts have held that federal courts cannot be used as a tool to support federally illegal conduct, and trustees cannot be forced to possess or sell cannabis or to assist in ongoing violations of federal law by participating in plans that utilize cash derived from cannabis-related activities.[4] In the case involving the City of Chester, a bankruptcy court will need to approve the petition and confirm the municipality’s debt adjustment plan if the City is allowed bankruptcy relief. It remains to be seen whether this case will play out differently for a municipality, versus an individual or business, and whether this might be the straw that breaks Congress’ back in terms of enacting reform sooner rather than later.
In 2021, legal U.S. cannabis sales grew 30 percent to $22 billion, significantly surpassing the amount Americans spent on wine ($17.5 billion) Cannabis sales are expected to rise another 20 percent this year.[5] It is clear that cannabis is here to stay, and the federal government should insert itself into the process—if only to reap the benefit of all the untapped tax revenue it could be generating. With sales skyrocketing and the continued expansion in legalizing recreational use on the state level, federal cannabis laws are needed more than ever. Legal work in this area goes far beyond completing applications and communications with the state. Advice is now sought to guide the formation of new cannabis businesses and assist those companies with legal compliance.
While there is still a fine line to walk from an ethical standpoint, law firms large and small have taken on clients in this burgeoning legal field. Illinois State Bar Association Professional Conduct Advisory Opinion 14-07 addressed this topic in 2014 (and has not spoken on the issue since); Opinion 14-07 refers to Rule 1.2(d) of the Rules of Professional Conduct, discussed above. The opinion states that a lawyer may provide services (such as negotiating agreements and drafting corporate and contractual documents) to clients who wish to operate a medical marijuana business if the lawyer “concludes that a client’s conduct complies with state law in a manner consistent with the application of federal criminal law.” The opinion does not explain how the two can be reconciled, except by referencing “the accommodation provided by the Department of Justice,” which has issued a memorandum that indicates the DOJ will exercise prosecutorial discretion in this area.
Finally, in Colorado, where medical and recreational cannabis has been legal for almost 10 years, the state has now legalized psychedelics (following Oregon in 2020). Maybe that will be the next area of law to flourish, but that will be a trip for another day.
[1] The MORE Act was first passed by the House in December 2020 but the Senate did not give the More Act a hearing or a vote in 2020. This year, it was filed again and passed again in the House.
[2] Cannabis has been a Schedule 1 Controlled Substance (drugs with no currently accepted medical use and a high potential for abuse) for the last 52 years at the federal level.
[3] According to Reuters, only 7% of banks and 3% of credit unions offer a cannabis program, and some charge 400 times more for a cannabis business account than a typical business banking account. https://www.reuters.com/world/us/us-pot-sellers-stash-cash-banks-leave-them-high-dry-2021-05-24/
[4] See article in JDSupra by William Hackney, https://www.jdsupra.com/legalnews/could-a-small-town-in-pennsylvania-8850150/
[5] See Reuters, citing to data obtained from Euromonitor. https://www.reuters.com/world/us/us-pot-sellers-stash-cash-banks-leave-them-high-dry-2021-05-24/
