SOURCE: JD SUPRA: https://www.jdsupra.com/legalnews/the-cannabis-rescheduling-1675084/
In light of the August 30, 2023 historic recommendation from the U.S. Department of Health and Human Services (HHS) to reschedule cannabis to Schedule III, a multidisciplinary group of attorneys from Foley Hoag’s nationwide Cannabis practice provides the following outlook and analysis of what’s next:
1) What happened?
The U.S. Department of Health and Human Services (HHS) made a recommendation to the U.S. Drug Enforcement Administration (DEA) that cannabis be moved from a Schedule I Controlled Substance to a Schedule III Controlled Substance under the federal Controlled Substances Act. The law defines Schedule I controlled substances as having “no currently accepted medical use and a high potential for abuse.” The law defines Schedule III controlled substances as having “a moderate to low potential for physical and psychological dependence.” Both Schedule I and Schedule III drugs are illegal to possess, distribute, and manufacture without a prescription or DEA registration, although the criminal penalties are different. There are five schedules of controlled substances under the Controlled Substances Act.
2) Why did HHS make this recommendation?
Last year, President Biden directed HHS and the Attorney General (from whom Controlled Substances Act listing authority has been delegated to DEA) to “initiate the administrative process to review expeditiously how marijuana is scheduled under federal law.” The Controlled Substances Act gives HHS the authority to make recommendations to DEA on scheduling decisions and moving drugs from one schedule to another based on data, including a scientific and medical evaluation. The Food and Drug Administration (FDA), within HHS, conducts this scientific and medical review.
3) What happens next?
The decision to reschedule cannabis to Schedule III rests with the Attorney General/DEA. DEA is the agency with authority to propose a rule that would effectuate the de-listing and formally promulgate that rule as a regulation. The factors DEA considers will be: (1) cannabis’ actual or relative potential for abuse; (2) Scientific evidence of its pharmacological effect, if known; (3) The state of current scientific knowledge regarding the drug or other substance; (4) Its history and current pattern of abuse; (5) The scope, duration, and significance of abuse; (6) What, if any, risk there is to the public health; (7) Its psychic or physiological dependence liability; (8) Whether the substance is an immediate precursor of a substance already controlled under the Controlled Substances Act.
4) What role does the HHS recommendation play in DEA’s decision?
It’s very important. Under the Controlled Substances Act, HHS’ recommendations “shall be binding . . . as to  scientific and medical matters.”
5) If DEA agreed that cannabis should be a Schedule III Controlled Substance, how would it effectuate that re-scheduling?
The Controlled Substances Act requires that DEA undertake formal rulemaking procedures under the Administrative Procedures Act. This is extremely rare. Most regulations are promulgated by an agency proposing new regulatory language through publication of the proposed regulation in the Federal Register along with reasons for its proposal. The agency will open a public comment, then publish a final regulation in the Federal Register with responses to comments and explanations for any changes. The formal rulemaking procedure is similar, but also requires, in this case, that DEA hold public hearing on the record with the presentation of evidence, similar to a courtroom proceeding. An administrative law judge (or judges) who works for the agency, will then make a decision whether to adopt the regulation. The decision of these agency “judges” becomes the final regulation published in the Federal Register. All final regulations are subject to challenge and judicial review in federal court.
6) What are some of the challenges a re-scheduling order would face, either in formal rulemaking or upon judicial review?
The biggest legal hurdle is an international treaty: the Single Convention on Narcotic Drugs (1961), to which the US is a signatory. This treaty requires that cannabis be controlled in a certain manner not unlike a Schedule I or Schedule II drug under the Controlled Substances Act. In insolation, that is not much of a problem, as many other signatory countries have already legalized cannabis. The issue is that the Controlled Substances Act itself (which is a statute) binds the Attorney General to follow that treaty. In other words, it’s not just the treaty that applies, but U.S. law incorporating the terms of the treaty. The Controlled Substances Act requires the Attorney General to place drugs “under the schedule he deems most appropriate to carry out [the United States’ treaty] obligations,” regardless of the Act’s listing criteria or any HHS recommendation. Compounding the issue is a decision of the United States Circuit Court of Appeals for the District of Columbia from 1971 finding that “several requirements imposed by the Single Convention would not be met if cannabis and cannabis resin were placed in CSA Schedule III, IV or V.” There is a healthy legal debate about what the Attorney General’s treaty obligations are with regard to rescheduling cannabis, but this is surely a tricky issue.
Another challenge is that DEA and HHS determined as recently as 2016 – on a petition filed to reschedule cannabis – that cannabis belonged as a Schedule I drug. The agencies reached this decision after a scientific review by FDA and application of the Controlled Substances Act factors by DEA. Agencies are entitled under case law to “change their mind,” but they must provide a reasonable basis for doing so. HHS and DEA will have to show changes in scientific literature and reasonable evidence supporting this new change in position from the differing data they reviewed just seven years ago.
7) Will a court uphold a rescheduling order if DEA adopts one?
Typically, agency decisions are afforded great “deference” by courts. The deference is even stronger when an agency is exercising its specialized scientific or technical expertise, as would be the case here. The Attorney General’s interpretation of the U.S.’ treaty obligations also is afforded very wide deference. But courts can be political and unpredictable. There is simply no way to make a definitive prediction.
8) Will politics play a role in DEA’s decision?
The Biden administration is saying this decision will be solely driven by science, as required by law. It bears note that the president ordered this re-examination right before the mid-term elections, and the rescheduling order (if one comes to pass) would coincide with the 2024 election swing.
9) What would be the immediate impact of an order rescheduling cannabis to Schedule III?
280E would go away! Immediately, businesses could claim business deductions and lower their tax burden. The anvil of so-called “280E” (26 U.S. Code § 280E) would go away. Section 280E disallows any “deduction or credit . . . for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act).”
Also importantly, penalties for federal cannabis crimes would be lower.
10) What will not change?
- Cannabis will not be federally legal.
- Cannabis will not become legal in states that do not authorize medical and adult use licensed cannabis businesses.
- Cannabis companies with “plant touching” operations in the U.S. will not immediately be able to list on major U.S. Exchanges.
- FDA will not assume any immediate or enhanced regulatory oversight or enforcement capability with regard to state-legal cannabis operators and operations.
- Interstate commerce in cannabis will not be legal.
- There will not be a federal dragnet on state-licensed cannabis businesses because those business do not have DEA registration or follow certain FDA guidelines. The uncomfortable status quo of federal illegality and state legality remains.
11) What could change?
In the long term, a lot. In the short term, not much. There is no crystal ball, but some implications of re-scheduling are:
- FDA. FDA could provide certain guidelines or subject cannabis to existing regulatory authority.
- However, Foley Hoag’s FDA specialists caution this is likely to be a slow, incremental process, in the absence of legislation. Some commenters have addressed a fear that FDA regulation will preempt state regulation of cannabis once rescheduling occurs because cannabis will now have accepted medical uses, making it a “drug” within FDA’s authority. There are many issues with this line of reasoning. First, FDA has authority today to regulate cannabis and assert jurisdiction. A Schedule I listing is not a bar to FDA enforcement. Second, some intervening action by FDA or Congress will likely occur before FDA exercises meaningful enforcement oversight with regard to state-legal cannabis. The most likely, as we have seen with hemp-derived cannabidiol (CBD) under the 2018 Farm Bill, could be against state-legal actors that make unproven health claims. Eventually FDA could impose a number of regulatory requirements, such as: labeling restrictions (which could include the requirement of a prescription), identity, purity, and composition standards, establishment registration and product listing, and good manufacturing practices (GMPs) for certain drugs. But there are some important caveats here: FDA regulates drugs in a specific manner, i.e., for specific formulations, specific indications and specific populations. There are countless cannabis formulations and doses being marketed today, and a small body of peer-reviewed research. Regulation of nationwide state-legal cannabis just doesn’t fit FDA’s drug regulation model. FDA will likely be methodical in asserting its jurisdiction, and if it does, it would probably do so through rulemaking. The more likely scenario (as we’ve seen with CBD and hemp-derived cannabinoids) is that FDA determines it needs additional authorization and funding from Congress, such as for a cannabis “Center” similar to its “Center for Tobacco Products,” before it engages in any comprehensive regulation. Third, FDA preemption is a complex area of law. It is certainly not a foregone conclusion that FDA regulation will entirely preempt state regulation or even many areas of state regulation. Preemptive effect – in the absence of new comprehensive cannabis legislation passed by Congress – is likely to be piecemeal. One thing is for sure: there is no FDA playbook for this. It is unchartered territory, and if past is prologue, the agency will be incremental and careful in any assertion of jurisdiction in the absence of new federal legislation.
- Investment. Rescheduling may reinvigorate capital markets, as investors see less risk due to federal illegality when cannabis is a Schedule III vs. Schedule I drug.
- Uplisting. Rescheduling could cause Nasdaq and NYSE to re-evaluate their position prohibiting the listing of plant-touching U.S. companies.
- New Federal Guidance. We could see a refresh of the “Cole Memorandum” issued by Attorney General Garland in the coming weeks or months that could provide more concrete guidance on the legality of the state-level cannabis industry, banking and capital markets.
- Federal Legislative Momentum for Legalization. Rescheduling could unstick legislative action on cannabis, such as the Safe Banking Act, the MORE Act, or the Cannabis Administration and Opportunity Act (which provides a framework for federal legalization and oversight of cannabis).
- Interstate Commerce. Rescheduling could make state laws that require all cannabis sold in state to be produced in state more susceptible to legal challenge under the Dormant Commerce Clause to the U.S. Constitution. There is minimal legal difference in that argument under Schedule I vs. Schedule III, except that more activity is theoretically nationally authorized under Schedule III, such as FDA drug development, scientific research, etc. Those battles would, however, play out piecemeal through the slow churn of litigation. State-by-state, circuit-by-circuit, law-by-law, state laws could fall to commerce clause challenges (as has recently happened to Maine’s residency restriction in the U.S. Court of Appeals for the First Circuit,) until eventually the U.S. Supreme Court does – or does not – issue a ruling. Vulnerable to challenge would be rules that are patently violative of the Commerce Clause (residency restrictions and sadly, a variation of residency restrictions, which are social equity licensing reservations for residents living in disproportionately impacted areas of a state). The much harder cases such as rules requiring in-state production, testing, and sale, and the open questions, like state-specific testing, labeling, potency, and other standards, which have valid purposes beyond state economic protectionism.