Reading the tea leaves: What might federal legalization of marijuana look like? – Reuters

November 15, 2021 - It should come as no surprise that Americans' attitudes toward cannabis, and cannabis legalization, have come a long way since President Richard Nixon signed the Controlled Substances Act ("CSA") of 1970 into law. Once associated with the War on Drugs, cannabis has become big business, with the state-legal cannabis market expected to reach over $40 billion in the United States by 2026.

Support for full federal legalization is at an all-time high, with 60% of adults believing that marijuana should be legal for both medical and recreational use. This is consistent with the fact that Americans now have access to either medical or adult-use cannabis under state laws in most states: Since 2012, 18 states and Washington, D.C., have legalized adult-use marijuana, while 37 states have legalized medical marijuana.

The fact that the industry remains federally illegal has very real implications: The cost of capital remains high, federal protections (such as bankruptcy and trademarks) remain out of reach, banking access is constrained, and many tax deductions are unavailable. And, as recent prosecutions have shown, federal authorities will step in from time to time, often unleashing an arsenal of powerful tools available to them under federal law, in dealing with industry participants who cross the line. This is a lesson the defendants in United States v. Akhavan, out of the Southern District of New York, recently learned when they were convicted of trying to circumvent bank payment processing policies.

In practical terms, continued federal prohibition means that there is no nationwide market for state-legal cannabis. Instead, there are dozens of individual, insular markets in which diversion of cannabis across state lines is strictly prohibited.

While federal cannabis legalization does not appear to be a priority for the Biden administration, efforts continue in the House and the Senate to bring federal policy closer in line with state laws. It is therefore a good time to look at what federal legalization efforts may look like in the short and long terms.

Short term -- protecting the infrastructure

As noted above, state-legal marijuana related businesses ("MRBs") pay more for services that many business owners in other industries take for granted, like banking and insurance. Over the last few legislative cycles, several bills were introduced to address those bottlenecks.

The bill showing the most promise is the Secure and Fair Enforcement ("SAFE") Banking Act, which has been passed by the House five times (although it has never made it through the Senate).

The SAFE Banking Act would prohibit federal regulators from penalizing financial institutions for providing banking services to state-legal MRBs. Prohibited penalties include terminating or limiting the deposit insurance or share insurance of a depository institution solely because the institution provides financial services to legitimate MRBs and prohibiting or otherwise discouraging a depository institution from offering financial services to such a business. Additionally, proceeds from a transaction involving activities of a legitimate MRB would not be considered proceeds from unlawful activity (and, therefore, would not be subject to anti-money laundering laws).

A similar bill was introduced for the insurance industry, as the Clarifying Law Around Insurance of Marijuana Act ("CLAIM Act"). That bill would prohibit federal agencies from penalizing or discouraging a company in the business of insurance from transacting with MRBs that are operating in compliance with state and local law. The CLAIM Act expressly provides that insurance businesses may not be held liable pursuant to any federal law or regulation solely for engaging in the business of insurance with an MRB.

These bills backed by powerful, legitimate industries enjoy the type of bipartisan support that broader legalization bills do not.

Long term -- re-scheduling or de-scheduling of cannabis

Two ambitious bills were recently introduced in Congress to essentially end federal cannabis prohibition. In the House, the Marijuana Opportunity Reinvestment and Expungement ("MORE") Act of 2021 would remove cannabis from the CSA and expunge cannabis convictions. In addition, the Act would bring in federal tax revenue by imposing an initial 5% tax on retail sales of cannabis, which would increase to 8% over three years. This tax revenue would fund the federal Opportunity Trust Fund to be used for community reinvestment.

The MORE Act was reintroduced in the House on May 28, 2021 and is in the first stage of the legislative process. A similar measure was introduced in the Senate as the Cannabis Administration Opportunity Act ("CAOA"). Similar to the MORE Act, CAOA would decriminalize and deschedule marijuana federally. While CAOA recognizes state law as controlling the possession, production and distribution of cannabis, the law would preempt states from interfering with interstate commerce where a lawful cannabis delivery requires transport through the state's borders. This is similar to how preemption was structured with respect to hemp in the 2018 Farm Bill.

CAOA also proposes a federal excise tax of 10% on cannabis in the first year the bill is enacted, increasing to 25% after five years. Part of this tax revenue would be reinvested in communities adversely impacted by the War on Drugs.

These ambitious measures don't have the bipartisan support the SAFE Banking Act enjoys. Nor does the Biden administration appear to be particularly enamored with adult-use cannabis legalization. And while the Biden administration appears to be open to re-scheduling cannabis to Schedule II under the CSA from the more restrictive Schedule I where it currently resides there has been no detailed proposal to do so.

A recent report released by the Congressional Research Service ("CRS") suggests that the president could take certain steps to effect such changes without congressional support by exerting influence over agencies that control the re-scheduling process (namely the DEA, HHS and the FDA). This idea is not new, and the report was swiftly criticized by Professor Robert A. Mikos, one of the nation's leading experts on federalism and drug law, who has long argued that the authority to re-schedule drugs under the CSA is much more limited than CRS's report suggests.

Getting legalization right

Among the various stakeholders who are in no way a unified bloc there are real concerns about getting federal legalization right. When it comes to the piecemeal approach of the SAFE Banking Act and the CLAIM Act, there are worries by advocates that passing the legislation would take away from the overall momentum of broader legalization, as the established business interests might feel protected as a result of passage.

At the same time, certain stakeholders are worried about the rapid de-scheduling of cannabis because it would allow established companies, currently operating in major markets, to use their economies of scale to dominate the market, pushing out start-ups and competitors (including social equity applicants that enjoy certain advantages under current state cannabis laws). And, if recent experience with hemp and CBD is any indication, federal regulators are likely to step in as soon as cannabis is de-scheduled to reassert their authority. Unless the groundwork for legalization is laid down in advance, legal uncertainty will simply be replaced with a regulatory one.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias. Westlaw Today is owned by Thomson Reuters and operates independently of Reuters News.

Alex Malyshev is a partner at Carter Ledyard & Milburn LLP, and the chair of its Cannabis, Hemp & CBD Industry Group. He contributed the chapter, Banking and Investment Considerations for Cannabis Businesses in Health Care and the Business of Cannabis: Legal Questions and Answers, (American Health Law Association 2021). He is based in New York and can be reached at malyshev@clm.com.

Sarah Ganley is an associate in the Litigation Department of Carter Ledyard & Milburn LLP and can be reached at ganley@clm.com. She is based in New York.

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Reading the tea leaves: What might federal legalization of marijuana look like? - Reuters