November 8, 2023 - As in previous years, 2023 began with the promise of possible cannabis reform at the federal level, with the SAFE Banking Act being reintroduced in Congress once again (now rebranded as the SAFER Banking Act, after revisions). Unlike previous years, there was even serious talk of re-scheduling Cannabis to Schedule II — or possibly even Schedule III — of the Controlled Substances Act ("CSA"), after President Biden's direction to the DEA (Drug Enforcement Administration) to re-evaluate the placement of cannabis on Schedule I. But, as 2023 draws to a close, neither effort appears to be anywhere near the finish line.

Now, under pressure from economic headwinds facing the industry, the largest cannabis companies — known as multi-state operators or "MSOs" — appear to be embracing litigation as a viable alternative strategy for federal cannabis reform.

The latest broadside was launched by Verano Holdings Corp — a publicly traded cannabis company that is currently trading at approximately 15% of its all-time high — in the United States District Court for the District of Massachusetts in a lawsuit against the U.S. government, broadly challenging the constitutionality of the CSA under the Commerce Clause, the Necessary and Proper Clauses, and on Due Process grounds.

It is probably not a coincidence that the lawsuit, titled Canna Provisions, Inc. et al., v. Garland, No. 23-cv-30113 (D. Mass, 2023), was brought by Verano and its co-plaintiffs in the same circuit that invalidated Maine's residency requirement on Dormant Commerce Clause ("DCC") grounds last year in Northeast Patients Group v. United Cannabis Patients & Caregivers of Maine, 45 F.4th 542 (1st Cir. 2022).

Other courts, most prominently the United States District Court for the Northern District of New York, followed the 1st U.S. Circuit Court of Appeals' reasoning in Northeast Patients Group, finding similar restrictions discriminating against out-of-state residents unconstitutional (notwithstanding the federal prohibition on cannabis).See Variscite NY One, Inc. v Defendants, 640 F. Supp. 3d 232 (N.D.N.Y. 2022).

The plaintiffs in Canna Provisions allege that the CSA, which prohibits the cultivation, manufacturing, sale, and possession of cannabis under federal law, has unlawfully disrupted the business activities of regulated, state-legal cannabis operators. While conceding that Congress has the power to ban interstate commerce of cannabis pursuant to its authority under the Commerce Clause — which gives Congress broad authority to regulate interstate commerce — the complaint posits that the CSA represents a grievous Congressional overreach because it criminalizes conduct occurring entirely within states that have legalized cannabis. This creates a risk of prosecution under federal law for plaintiffs, who are otherwise operating legally under state law.

Plaintiffs' core contention is that, over the last two decades, the federal government has abandoned the CSA's goal of eliminating cannabis from interstate commerce; that goal was the basis for the Supreme Court's 2005 decision in Gonzales v. Raich, 545 U.S. 1 (2005). The decision in Gonzales rejected previous challenges to the CSA, holding that the federal prohibition on cannabis preempted (or superseded) state laws seeking to legalize and regulate cannabis. In upholding Congress's authority under the Commerce Clause to prohibit the local cultivation and use of marijuana pursuant to the CSA, the majority in Gonzales found that Congress had an interest in preventing state-authorized marijuana from reaching interstate markets.

More specifically, the plaintiffs in Canna Provisions allege that the three following factual assumptions underlying the Court's finding in Gonzales that Congress had an interest in preventing state-authorized marijuana from reaching interstate markets are no longer true today: (1) a congressional finding that "distribution and possession of controlled substances contribute to swelling the interstate traffic in such substances"; (2) that marijuana was a fungible commodity, akin to wheat; and (3) that Congress's goal in passing the CSA was to create a "closed regulatory system" that would "eliminat[e] commercial transactions in the interstate market [for marijuana] in their entirety." Plaintiffs contend that because these assumptions have changed so dramatically in the 18 years since Gonzales, the majority's analysis upholding the CSA is no longer relevant and warrants revisiting.

The plaintiffs argue that the siloed cannabis regulatory schemes in the states that have legalized cannabis (each of which specifically precludes interstate commerce in cannabis) mean that there has been a great reduction in transportation of cannabis across state lines. Moreover, plaintiffs argue that state "legal" cannabis is not fungible with, and is thus distinguishable from, illicit cannabis because of the labeling and tracking requirements that come with regulated cannabis. Finally, plaintiffs argue that the federal government has abandoned its goal of eliminating cannabis from interstate commerce, noting, in particular, that federal drug enforcers have made no effort over the past 18 years to meaningfully restrict intrastate cannabis markets in states that have legalized the drug.

While the first two premises are debatable — and are likely to change in the long run if plaintiffs and their allies are successful (since economies of scale and interstate commerce are the true goal of MSOs) — there is certainly evidence to support the view that the federal government has thrown in the proverbial towel on the outright elimination of cannabis from interstate commerce.

Plaintiffs seek an order declaring the CSA unconstitutional as applied to the intrastate cultivation, manufacture, possession, and distribution of cannabis pursuant to state law and blocking the Department of Justice from enforcing the CSA against cannabis companies operating legally under state law, arguing that enforcement against such companies would undermine the goals of state-level regulatory regimes. This approach is similar to the "STATES Act," which has been periodically introduced in Congress to protect individuals and businesses from violations of the CSA if they are operating in accordance with state law.

Indeed, plaintiffs mainly rely on Congress's purported abandonment of its goal of eliminating cannabis from interstate commerce in seeking a declaration that the CSA, as applied to the plaintiffs' activities, violates the Commerce Clause and the Necessary and Proper Clause of the U.S. Constitution. Although aggressive, the argument is not entirely novel.

A variation of this argument—focusing on whether the CSA preempted (or superseded) state law—was adopted by the New Jersey Supreme Court in 2021 in Hager v. M&K Const., 246 N.J. 1 (2021), which analyzed the conflict between the CSA and New Jersey's Compassionate Use Act, which legalized medical cannabis in the Garden State. In upholding a lower court decision affirming a workers' compensation order directing defendant M&K Construction to reimburse its former employee for the costs of his medical marijuana after a work-related injury, the New Jersey Supreme Court rejected M&K Construction's argument that, in the context of the workers' compensation order, New Jersey's Compassionate Use Act was preempted by the CSA.

Although the Court did not go as far as finding that Congress has abandoned enforcement, it held that the CSA, at least as applied to New Jersey's Compassionate Use Act, was effectively suspended by various congressional budget actions protecting medical cannabis. As the New Jersey Supreme Court recognized, however, other states—including, specifically, Maine and Massachusetts—previously reached the opposite conclusion. See Bourgoin v. Twin Rivers Paper Co., LLC, 187 A.3d 10 (Me. 2018); Wright's Case, 486 Mass. 98 (Mass. 2020).

It may well be an uphill battle for the plaintiffs in federal court, especially given that the Supreme Court was reluctant to wade into the morass when presented with the opportunity to do so in Bierbach v. Digger's Polaris, which sought to reconcile these different approaches. The petition for certiorari in that case, out of the Supreme Court of Minnesota, was denied in January of 2022, after the Solicitor General took the position that federal preemption still exists.

Still, this latest salvo indicates that, as legislation continues to stall, plaintiffs are more willing to test their luck and novel legal theories in courts. We are already starting to see plaintiffs test the waters when it comes to challenging the constitutionality of federal and state prohibitions on interstate cannabis commerce. For example, a cannabis wholesaler recently filed suit in the District of Oregon alleging that Oregon's policy of blocking the out-of-state sale of cannabis (a policy shared by all states) runs afoul of the DCC. The plaintiffs in that case — Jefferson Packing House, LLC v. Kotek et al., No. 3:22-cv-01776 (D. Or.) — argue that the fact cannabis is federally illegal does not mean that the protections of the DCC are inapplicable. The case is currently pending.

It remains to be seen whether this strategy will prove to be a viable alternative for federal cannabis reform. But if legislative solutions continue to stall, we are likely to see more of these cases crop up in the years ahead.

Originally published by Reuters.

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