While it appears that New York is currently reassessing its approach to the roll out of its adult-use cannabis program, it is important to take a step back and look at movement on the national level, and how it might impact New York in the years to come.
As readers of this column know, I have written quite extensively about the growing pains New York has experienced in rolling out its adult-use cannabis program. The process is still unfolding, and the Office of Cannabis Management (OCM) has come under quite a bit of criticism this year from the governor, ultimately resulting in the departure of its inaugural director, Chris Alexander.
While it appears that New York is currently reassessing its approach to the rollout, while simultaneously balancing the interests of multiple (sometimes competing) stakeholders in the ecosystem, it is also important to take a step back and look at movement on the national level, and how it might impact New York in the years to come.
Potential Consequences of Rescheduling
The inescapable headline these days is the movement toward rescheduling of Cannabis to Schedule III. The most immediate impact—at the conclusion of the Drug Enforcement Administration's rulemaking process—will be the removal of Internal Revenue Code 280E as a barrier to profitability, as businesses engaged in the sale or distribution of Schedule III drugs are able to take most ordinary business deductions (whereas Schedule I drugs, like Cannabis currently, cannot).
However, looking ahead, it is important to understand that rescheduling has the potential to create a "tale of two cities" in states (like New York) that have enacted both a medical and a recreational market. (An important caveat is that, as the non-partisan Congressional Research Service (CRS) explains, none of the current medical programs actually comply with Schedule III requirements. Therefore, amending New York's program would need to be an area of focus to the extent that taking fuller advantage of rescheduling is a goal (in the absence of congressional action)).
First, the legal shield afforded to medical-cannabis market participants, but not applicable to recreational cannabis, by virtue of the annual congressional budget rider (restricting the use of funds by the U.S. Department of Justice), is not affected by rescheduling.
Second, when it comes to intellectual property, the U.S. Patent and Trademark Office, which has generally prohibited the issuance of trademarks to cannabis-related brands because cannabis has no legal use, may draw a distinction between medical and non-medical brands. There is precedent for this, as was the case with hemp after the 2018 Farm Bill.
Third, the Department of the Treasury, acting through the Financial Crimes Enforcement Network (FinCEN), may further clarify its guidance to financial institutions with respect to banking for the medical vs. the recreational market. It has already done so once, when Congress legalized hemp. This may well make it easier (and cheaper) to provide banking services to state-compliant medical cannabis businesses.
Fourth, Customs and Border Protection and U.S. Citizenship and Immigration Services both have regulations applicable to the use of cannabis (with respect to both products and people). Movement to Schedule III may well lead to internal reassessment.
Finally, the benefits of bankruptcy and reorganization under the U.S. Bankruptcy Code would be available to medical cannabis companies in compliance operating under systems in compliance with Schedule III. As things stand now, the Bankruptcy Court's doors are closed in the United States.
Again, except for IRC 280E and the relaxing of criminal penalties, none of these potential changes will provide any relief to participants in the recreational market. This is a source of friction within the broader cannabis legalization coalition, as the recreational market is where states have tried to address the harm caused by the war on drugs through their social equity programs (funneling those with prior convictions into the recreational market, as New York has tried to do). To the extent relaxed cannabis restrictions result in an inflow of cash to the medical market, and an exit from the recreational market, those social-equity program participants would be the first casualties.
It is also worth noting that state cannabis regulatory schemes have already been subject to much litigation on U.S. Constitutional Dormant Commerce Clause (DCC) grounds. The argument, that states are discriminating against out-of-state cannabis license applicants by favoring in-state applicants, has seen varying degrees of success in federal courts.
One potential defense has been that, because cannabis remains totally illegal on the federal level, it falls outside the scope of the DCC. Movement to Schedule III will likely lead to a new variation of the argument that the restriction on moving cannabis across state lines is in itself a violation of the DCC. This could have profound consequences for New York's farmers, as economies of scale (and New York's climate), would make it hard (if not impossible) to compete.
The Civil War Between Hemp and Cannabis
Another development worth watching is the unfolding civil war between the hemp and the cannabis industry. The 2018 Farm Bill carved out "hemp" from the definition of "cannabis" based on a percentage of THC present in the plant. In the ensuing six years, a multibillion-dollar industry has developed for intoxicating extracts such as "Delta-8 THC," which, some argue, do not fall within the definition of cannabis.
It is important to note that the DEA disagrees with this position, but it has nevertheless not moved to shut down the industry.
This year, the hemp-related news cycle has focused on efforts to amend the definition of "hemp" to close this perceived "loophole." The Miller Amendment, as it is known, was adopted as part of a package during a May 23 markup hearing for the draft 2024 Farm Bill by the House Agriculture Committee.
While it is not certain that the amendment will survive, it is worth nothing that many hemp industry activists have accused interests in the "big cannabis" industry of lobbying for it. Therefore, even if this industry killing amendment is not ultimately included in the 2024 Farm Bill, it may well be seen as an opening salvo in a war once we look back years from now.
Conclusion
While it's true that no one has a crystal ball, it is also likely that the problems New York is dealing with today are not going to be the problems it deals with tomorrow (let alone in 2030). It is therefore worthwhile for industry participants to take a step back and consider the larger picture.
Originally published by New York Law Journal
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