What to expect if marijuana rescheduling is approved – South Carolina Lawyers Weekly

By Christine Baily

In the evolving cannabis industry, legal advisers are frequently asked what to expect of the proposed rescheduling of marijuana under the Controlled Substances Act, or CSA.

Because marijuana is in Schedule I of the CSA, cannabis businesses and their advisers operate in a world of uncertainty where state-licensed activity is federally illegal. Many business owners are waiting to see if the Drug Enforcement Administration’s decision will change how they do business.

This commentary explores the DEA’s rescheduling of marijuana from Schedule I to Schedule III of the CSA, the recommendation of the U.S. Department of Health and Human Services. In this scenario, medical-use businesses will operate under new federal and state rules without the risk of violating federal law.

• The DEA can decide whether to reschedule or de-schedule marijuana under the CSA: Since 1970, marijuana has been placed in the most restrictive schedule of the CSA. Under Schedule I, marijuana does not have any accepted medical use for treatment and cannot be dispensed with a prescription.

Thus, it is illegal to produce, dispense or possess marijuana unless an exception applies, e.g., federally approved research. Violations of the CSA and other federal statutes can lead to criminal charges.

In 2022, proponents of legalization were encouraged when President Joe Biden asked HHS to review the scheduling of cannabis (Cannabis sativa L.) that is within the definition of “marihuana” or “marijuana” under the CSA.

In 2023, HHS issued a recommendation to the DEA that marijuana be reclassified to Schedule III, which is significantly less restrictive than Schedule I.

Early this year, HHS released its records, finding that marijuana has an accepted medical use for treatment. Importantly, HHS’s recommendation provides a scientific and medical rationale for rescheduling.

While it is bound by HHS’s recommendation on scientific and medical matters, the DEA can exercise its authority and discretion regarding rescheduling marijuana.

Rescheduling will impact medical-use businesses, which leaves adult-use businesses continuing to operate under the constraints of federal illegalization. For these reasons, some proponents of legalization seek more than rescheduling. This includes U.S. Sen. Elizabeth Warren, D-Mass., and her colleagues who sent a letter to the DEA in support of de-scheduling marijuana.

• If marijuana is placed in Schedule III, the medical-use industry will change how it does business: The decision to reschedule marijuana to Schedule III will have the greatest impact on medical-use businesses, certifying health care providers, patients and caregivers.

As exciting as the possibility of rescheduling is, the necessary changes in federal and state law will take time. As the requirements under federal, state and municipal rules are clarified, there will likely be glitches.

At the start of the process, Congress and federal regulators will need to clarify the rules that govern how medical-use marijuana can be cultivated, manufactured, transported, delivered, prescribed and sold to patients.

The U.S. Food and Drug Administration plays a critical role as it clarifies rules and provides guidance for how marijuana can be prescribed and dispensed. The FDA can identify certain areas to be regulated nationally, e.g., testing and labeling.

Some expect that federal lawmakers might look to the prior process for regulating hemp after it was legalized under the 2018 farm bill. For example, the FDA can act more cautiously with marijuana after inadvertently allowing for the sale of a hemp-derived compound called delta 8-THC, a psychoactive substance.

At the same time, Congress will need to fund a wide range of agencies with regulatory oversight. With funding support, federal agencies will need to hire individuals with sufficient expertise to develop new policies, regulations and guidance, perhaps looking to state regulators with experience setting up these emerging markets in their respective states.

One example is the Internal Revenue Service, which will need to revise IRS Code Section 280E, which currently prohibits businesses from claiming certain business deductions and credits.

Another agency to watch is the Environmental Protection Agency, which will likely review petitions requesting that it establish tolerances for a pesticide’s use on crops, as it did for hemp.

Within federal agencies, there may be a need for cultural shifts in how marijuana is viewed, in addition to how it is regulated.

Meanwhile, state legislators and regulators will be closely tracking changes in federal law. Because federal law preempts state law, state lawmakers will likely cede jurisdiction in areas now under their authority. They will need to review and amend their existing statutory and regulatory schemes so that they are not in conflict with federal law.

There also is a possibility that federal agencies may ask their state counterparts to enforce federal law within their borders.

Case in point: After the 2018 farm bill removed hemp from the CSA, certain pesticides were approved for use in hemp cultivation. That led to policy changes for pesticide use at the state level, which is overseen by state agricultural agencies. A similar wait-and-review process will take place at the local level where prior municipal approval is required to be licensed by the state.

We also can expect federal and state courts to consider cases in which statutory or regulatory schemes need to be interpreted and applied, or where there are gaps in these schemes.

As with decriminalization and legalization, appellate courts will begin to look for cases that raise novel or unsettled issues of law. Some of the decisions issued before rescheduling might not have the same precedential effect after rescheduling and other changes in federal and state laws.

If marijuana is rescheduled to Schedule III, medical-use businesses might initially have a competitive advantage. As the CRS has observed: “The scope of and demand for FDA oversight for medical marijuana and related products may grow considerably.”

With FDA approval, a business could register with the DEA and comply with its regulatory requirements for Schedule III substances, which would allow marijuana to be dispensed to patients (and caregivers). The business also would likely comply with state rules that are not in conflict with federal rules.

Moreover, the business will be able to operate more like a traditional business. Business owners will have more options for financial and other services necessary to operate. They will engage in interstate commerce — buying and selling marijuana and marijuana products across state lines and registering federal trademarks.

Business owners will claim deductions and credits on federal income tax returns. They will access federal agencies and programs, including bankruptcy protection.

Relatedly, health care providers and medical-use patients will have increased access to marijuana. With approval from federal and state regulators (and malpractice insurers), providers could prescribe marijuana.

Once health insurers assess risk and adjust policies, patients could use insurance benefits to purchase marijuana, as an alternative to other more addictive substances.

In hospitals and institutions, patients will use marijuana for treatment, including as an alternative pain medication.

Importantly, pediatric patients who need marijuana to learn will work with their schools’ special education staff to include it in individualized education plans, and school nurses to dispense marijuana at their schools.

In general, patients also will be able to use marijuana without the risks of violating federal law and being denied federal benefits.

During this transition, Congress could avoid disruption in patient supply by passing an appropriations rider barring the U.S. Department of Justice from using taxpayer funds to prevent states from implementing their laws authorizing medical-use marijuana, as it has done in the past.

Providing legal advice in the cannabis industry can feel like you are in the Matrix, although it is not clear whether state legalization is the real world or a computer simulation.

As the industry continues to evolve, this kind of flexible mindset helps advisers understand that developing the statutory and regulatory structure for an entire industry at the federal level will be complicated, multilayered and sometimes glitchy.

There is hope that federal lawmakers will recognize and invite the expertise and experience at the state level, where many of us in industry and government have been there and done that. In this scenario, we can imagine a real world where the industry operates without the risk and uncertainty of violating federal law.

Christine Bailey advises businesses and individuals operating in regulated industries on obtaining government approvals, complying with requirements, responding to investigations and challenging government actions in the courts, including on appeal.