September 12, 2023 - Last month, Bloomberg reported that it had obtained a letter from the Department of Health and Human Services (HHS) recommending that the U.S. Drug Enforcement Agency (DEA) reclassify cannabis from Schedule I of the Controlled Substances Act (CSA) to Schedule III. The report includes confirmation from a DEA spokesperson that the letter with the recommendation was received, but as of the writing of this article, the letter has not been made public. "US Health Officials Urge Moving Pot to Lower-Risk Tier," Bloomberg, Aug. 30, 2023.

The letter comes some 10 months after President Biden called on the Secretary of HHS and the Attorney General to "expeditiously" review the scheduling of cannabis under federal law and, if adopted, would represent the biggest change in federal cannabis policy in 40 years.

Although industry watchers are cautious with respect to any major policy changes absent clear indication of imminent action — a lesson hard learned from the annual speculation around the SAFE Banking Act — the news is nevertheless a welcome sign for an industry under tremendous pressure. Reactions to the possible reclassification have broken down along traditional interest group lines, with social equity advocates calling it a possible handout to the pharmaceutical industry, and investors cheering the possible tax implications under Section 280 of the Internal Revenue Code.

Critics of the proposal also note that rescheduling (as opposed to "de-scheduling") would do little to close the ever-growing policy chasm between state and federal cannabis laws, as state cannabis laws are not designed for a Schedule III drug.

While it remains to be seen whether HHS's recommendation will ultimately be adopted by the DEA — which has final authority to schedule or reschedule a drug under the CSA — it is useful to review what moving cannabis to Schedule III would possibly look like for the industry.

What it means to be on Schedule I

Cannabis is currently listed as a Schedule I controlled substance under the CSA. Schedule I substances are defined as drugs with no currently accepted medical use and a high potential for abuse, such as heroin and LSD.

Given cannabis's status as a Schedule I drug, the manufacture, sale, or possession of cannabis remains federally illegal, even for personal medical purposes. Thus, under federal law, industry participants are potentially liable for (i) conspiring to manufacture and distribute marijuana, (ii) aiding and abetting the manufacture and distribution of marijuana, and (iii) acting as an accessory after the fact for the manufacture and distribution of marijuana, under 18 U.S.C. §§ 2, 3 and 371.

While an annual congressional budget rider commonly known as the "Rohrabacher-Blumenauer Amendment" precludes the Department of Justice from using any appropriations to prevent states that have adopted medical cannabis legislation from implementing their laws — which the 9th U.S. Circuit Court of Appeals has interpreted to also protect industry participants — various executive agencies (including the Internal Revenue Service, the Department of the Treasury, U.S. Customs and Border Protection, and the U.S. Patent and Trademark Office) have cannabis-specific rules that make participation in the industry challenging.

This, in turn, makes capital more expensive and constricts access to services like banking and insurance. Moreover, Section 280e of the IRC, which disallows most deductions for businesses involved in state-legal cannabis businesses, has emerged as one of the perennial problems for an industry under financial pressure.

In addition, the lack of standardized rules from federal agencies around things like labelling, testing, storage, and transportation of cannabis across state lines makes it challenging to operate in more than one state due to the need to comply with a patchwork of sometimes byzantine regulations.

What reclassification to Schedule III would mean

Schedule III controlled substances are drugs with a moderate to low potential for physical and psychological dependence. In general, Schedule III drugs such as ketamine and Tylenol with codeine are FDA-approved, uniformly regulated by the federal government, and are only legally available by prescription.

While critics for HHS's recommendation point out that rescheduling cannabis would not close the growing gap between state and federal marijuana policy, and that the vast majority of state-legal "adult use" or "recreational" cannabis transactions would remain federally illegal, moving cannabis to Schedule III would nevertheless provide significant benefits to the industry.

In particular, classifying cannabis as a Schedule III drug would mean that Section 280e of the IRC, which by its terms applies only to controlled substances on Schedules I and II of the CSA, will no longer apply to cannabis businesses. 26 U.S. Code §280E. Rescheduling would also open new avenues for research and medical uses, result in lighter criminal penalties for cannabis-related violations of the CSA, and would likely attract more investors, researchers, and entrepreneurs into the cannabis space.

It remains to be seen whether it would also attract more financial institutions, and other service providers, to the industry. If nothing else, rescheduling could also go a long way toward changing public perceptions about cannabis's safety and medical potential, which, in turn, may help reduce stigma and increase acceptance among those who remain skeptical about its medical use.

What's next?

The HHS recommendation now goes to the DEA, which will conduct its own review to determine whether cannabis ought to be rescheduled or remain on Schedule I. The DEA applies its own analysis and is not bound by HHS's recommendation. Indeed, on four prior occasions, the DEA has determined that cannabis failed to meet any of its criteria for rescheduling.

Most recently, in 2016, the DEA concluded that "marijuana has no 'currently accepted medical use' because... the drug's chemistry is not known and reproducible; there are no adequate safety studies; there are no adequate and well-controlled studies proving efficacy; the drug is not accepted by qualified experts; and the scientific evidence is not widely available."

Assuming the DEA doesn't simply sit on the report, its next public step would be to publish a proposed rule in the Federal Register, triggering a notice-and-comment period and potentially an administrative law hearing. Following the DEA's publication of its final review, affected parties could turn to the courts for judicial reconsideration.

There is no set timetable for the DEA to render its decision (and indeed there is no guarantee it would be ready to move before the next presidential election). And while a handful of federal lawmakers have reaffirmed calls for cannabis reforms, urging HHS and the DEA to act quickly, it remains to be seen whether the agencies will heed lawmakers' call to action. In the meantime, industry participants would be well served by giving thought to these issues.

Originally published by Reuters.

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