Greenbridge Corporate Counsel:Cannabis Cannibalism: How Federal Rescheduling Could Consume the State-Licensed Industry Without Safe Harbors Under the Federal Food, Drug and Cosmetic Act 

  Author: Khurshid Khoja https://www.linkedin.com/in/khurshid/   Rescheduling cannabis and THC to Schedule III of the federal controlled substances  act (“CSA”) seem like well-intended efforts to support medical research, while also eliminating exposure to Internal Revenue Code Section 280E (“280E”) by removing cannabis and THC from Schedule I.  But whether we reschedule cannabis to Schedule III or lower (or deschedule cannabis altogether), current state-licensed businesses  will need a carve-out for non-pharmaceutical “whole plant” cannabis products in order to keep these products from being swept into the federal Food, Drug and Cosmetic Act (“FDCA”) definition of what constitutes a drug product regulated solely by the Food and Drug Administration (“FDA”). Earnest efforts to meaningfully roll back federal cannabis prohibition should not cannibalize hard-fought wins in states where we’ve already defeated failed prohibitionist policies.  Even a well-intended measure may have lasting and irreversible repercussions. Would rescheduling make a material difference in support for medical research over other policy options—specifically, descheduling or the status quo?  And would it lead to existing state-licensed cannabis operators being treated like all other lawful businesses in the United States?  Or would it foreclose their access to certain markets, introduce well-capitalized competitors from the pharmaceutical space, and continue to block their access to banking? Could it also spur the pharmaceutical industry to leverage its resources to oppose descheduling cannabis, once they’ve been granted an effective monopoly over federally-lawful cannabis products regulated under Schedule III?   As cannabis industry advocates, we owe it to ourselves to examine proposals for rescheduling cannabis and THC closely and carefully to assess all potential benefits and drawbacks, and perform a sober cost-benefit analysis. Fortunately, there is extensive peer-reviewed legal and academic scholarship that thoughtfully examines the potential consequences of removing cannabis and THC from Schedule I. These assessments recognize the limited impact of administrative rescheduling. They also suggest the need for pairing rescheduling with additional legislative relief and statutory safeguards to protect the state-licensed cannabis industry from the unintended consequences of rescheduling:  While rescheduling has been popular among advocates, the press, and some members of Congress, it offers-at best-limited hope for reform. Such a move would not automatically bestow legal status on existing medical marijuana enterprises, and marijuana would still have to go through the lengthy process of FDA approval before being legally marketable. For tax purposes, placing marijuana in Schedule III would be the biggest boom to business, but beyond that, rescheduling would have limited effects on criminal penalties, banking services, and state-level recreational programs. The most notable effect of rescheduling would be to remove some research barriers for medical marijuana, but would lack the comprehensive effects many supports seek. (Emphasis added, and all internal citations removed from sources quoted herein.)  Some of these assessments highlight the grave potential risks of shifting primary responsibility for the enforcement of federal laws applicable to cannabis from the Drug Enforcement Administration (“DEA”) to the FDA, with the latter shoe-horning “whole plant” cannabis products into existing regulatory categories under the FDCA:  The end result [of removing cannabis from Schedule I] may be the FDA cracking down hard–perhaps in conjunction with state governments–on medical claims and any positioning of cannabis products as medical without successful completion of the arduous and expensive new drug application (NDA) process…. While proponents of medical cannabis may assume that the flower could simply be marketed as a dietary supplement outside the new drug framework, dietary supplement options are quite limited. Nor is marketing of medical cannabis in food an easy alternative, given the FDA’s complex framework for food regulation and its interaction with the new drug framework.  With that, I offer the following assessment of the potential benefits, limitations and drawbacks of rescheduling  “whole plant” cannabis products to Schedule III, citing existing peer-reviewed legal scholarship for support.   
  • BENEFITS OF RESCHEDULING TO SCHEDULE III
 
  1. Medical Research: Rescheduling cannabis from Schedule I to Schedule III, IV, or V would undoubtedly facilitate medical research, relaxing the researcher certification and licensure requirements currently imposed on cannabis research. It’s important to note however that rescheduling isn’t a necessary prerequisite for developing much-needed cannabis derived pharmaceutical drugs — though rescheduling cannabis to Schedule III would make it considerably easier and cheaper to do so compared to the current pathway for developing these drugs, which requires both a DEA Schedule I license and compliance with cannabis-specific hurdles codified in state and federal law. 
  1. Fair Taxation: Section 280E of the Internal Revenue Code prohibits existing cannabis businesses from deducting standard business expenses because their “trade or business . . . consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act).” Rescheduling cannabis to Schedule III would allow cannabis businesses to claim the same federal tax deductions that all other lawful businesses take. 
  • LIMITATIONS OF RESCHEDULING TO SCHEDULE III
  1. No Impact on Banking Access: While rescheduling would provide relief from IRC 280E, it offers very limited financial relief otherwise, having no positive impact on access to capital and/or financial services—basic business banking would continue to elude most of the industry.  As such, any effort to reschedule “whole plant” cannabis should be combined with legislation to reform banking laws (ideally the SAFE Banking Act) in order to address this blind spot. 
  1. No Impact on Criminal Penalties: Rescheduling would also do little to address federal criminal penalties for cannabis, which President Biden has called on Congress to reform. 
Because rescheduling would not change the federal status of the marijuana grown, processed, and sold in state-legal enterprises, it would have very little impact on criminal penalties. Generally, penalties for possessing drugs in lower schedules are less harsh than those in Schedule I or II. However, Section 841 of the Controlled Substances Act outlines minimum and maximum penalties for marijuana specifically, as enacted at various times in the 1980s. It is unlikely that rescheduling would have any impact on these mandatory penalties, and therefore congressional action amending the CSA would be necessary to reduce them.  As such, proposals for rescheduling should ideally incorporate the repeal of criminal penalties under the CSA that are specific to cannabis. It should be noted that the proposed carve-out discussed below for “whole plant” cannabis products would preclude criminal penalties under the FDCA for delivering unapproved new “drugs” into interstate commerce, introducing or receiving adulterated or misbranded foods into interstate commerce (or adulterating or misbranding foods already in interstate commerce), as well as other violations of the FDCA that would be premised on “whole plant” cannabis products being deemed “drugs” under the FDCA. That said, it should also be acknowledged that the vast majority of criminal penalties for cannabis offenses are currently imposed at the state level.  
  • POTENTIAL RISKS OF RESCHEDULING TO SCHEDULE III 
  • Overview of Potential Risks: Rescheduling cannabis from Schedule I to Schedule III would be a long overdue reversal of the federal government’s position that cannabis (like other Schedule I controlled substances) has no accepted medical use. While such a reversal would be a welcome admission, it also permits the FDA to acknowledge the accepted medical use of “whole plant” cannabis and cannabis products (as well as any accompanying health claims, as an enforcement priority) for the first time — as opposed to just individual cannabinoids used as active ingredients in “small molecule” cannabis-derived drugs previously approved through the FDA’s existing new drug application (NDA) process. As discussed below, rescheduling would largely remove the DEA from cannabis enforcement and enable the FDA to effectively occupy the field of regulating interstate cannabis commerce almost exclusively under the rubric of its small molecule and botanical “drug” paradigms under the FDCA — unless additional statutory protections are enacted concurrently.  The sad irony of opening up the regulated interstate market to medical cannabis through rescheduling is that the resulting application of the FDCA could lead to foreclosing access to the interstate market for the vast majority of state-licensed cannabis industry operators.
  Entrenching the FDA’s NDA path as the only legal route to the interstate and international cannabis markets, would effectively preventing current industry participants from accessing these markets as the capital costs of complying with the FDA’s drug regime would put them out of reach, and non-compliance would lead to federal criminal and civil penalties—hardly an improvement on the status quo and incentive enough to continue limiting operations to intrastate markets. As noted below, rescheduling doesn’t need to result in limiting the industry to the NDA pathway alone.   
  1. FDA Regulation of Whole-Plant Cannabis Products as “Drugs”.  The FDA exercises near-exclusive jurisdiction over the production, labeling, packaging, marketing, distribution and sale of “drugs” in the US (as the term is defined under the FDCA). “Explicit or implicit claims that a product containing cannabis (or a cannabis constituent) could treat disease, or even simply affect the functioning of the body, would turn that product into a ‘new drug’ that requires premarket approval from the FDA.”  
  Upon rescheduling cannabis to Schedule III or lower (or descheduling), the FDA could no longer simply defer to the DEA as the primary federal enforcement agency (as it has historically done with respect to Schedule I substances) and would likely exercise its authority over “drugs” on its own initiative, triggered by the cannabis industry’s own widely-publicized claims about the potential health and wellness benefits of medicinal cannabis: [I]f the seller (in interstate commerce) made claims about treating a disease or about affecting the structure or functioning of the body, the FDA would deem the cannabis a drug. Thus, claims that smoking the cannabis would promote relaxation, mitigate insomnia, reduce anxiety, or maintain the appetite would turn the cannabis into a regulated drug. In the absence of these claims, the agency might try to assert its drug authorities on the theory that the product’s design or the circumstances surrounding its use demonstrated its intended use as a drug.  Given the foregoing (and without any statutory amendments) it is all but assured that all existing medicinal cannabis products available in state markets would be deemed “drugs” under the FDCA as a matter of law:   Any product containing or made from cannabis would be deemed a “drug” by the FDA if it were associated with medical claims. Section 201 of the FDCA defines a “drug” as any article (item) “intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease in man.” The term “drug” also includes any article “intended to affect the structure or function of the body of man” (unless it is a food). Finally, anything intended as a “component” of a drug is also a drug. However, it is also true that the FDA could apply the “drug” definition to adult use products too, based on established medicinal uses among consumers: [While t]here is a solid argument that interstate transactions of cannabis only for recreational smoking also would not trigger the FDA’s jurisdiction…. It is also possible the agency would find an intended drug use even without claims—based on the [purveyor]’s knowledge of actual use in the market or perhaps its design.  
  1. Regulation of Cannabis as a “Drug” Would Foreclose Access to Interstate Commerce. In contrast with the CSA, which imposes jurisdiction over acts affecting interstate commerce,  
the FDCA is drafted even more narrowly. It is not sufficient for the agency to find a connection with interstate commerce; it generally must also find that a product or component of the product traveled in interstate commerce. That said, “the interstate commerce requirement generally does not meaningfully constrain the FDA’s authority.”  Put differently, the FDCA imposes FDA jurisdiction over any finished medicinal cannabis product delivered into the stream of interstate commerce, but also extends the FDA’s reach much further. As such, rescheduling to Schedule III, shifting primary enforcement responsibility from the DEA to the FDA, and applying the FDCA’s existing “drug” provisions could permanently freeze access to interstate and international markets for current state-licensed cannabis businesses, reserving those markets for well-capitalized pharmaceutical companies capable of navigating the NDA process. While rescheduling to Schedule III, and concurrently limiting current medical cannabis providers to purely intrastate operations might arguably preserve “the traditional medical cannabis industry — sale of whole plant-based products, by small operations, to locally-based consumers,” that outcome is not assured.   Cannabis that is grown, sold, and used entirely within the borders of one state will not fall within the FDA’s jurisdiction. This is true even if the seller makes medical claims about the product and if those claims are made in media, such as on the internet, that are accessible outside the state….  But there are reasons to be cautious about this pathway. To begin with, if the FDA is concerned about the claims made or about the safety of the product, it will strain to find a component that traveled in interstate commerce. Any inactive ingredient will qualify. In addition, the agency takes the position that sale of a product in one state for consumer use in another state constitutes introduction of that product into interstate commerce. This will include not only online sales to residents of other states but in-person sales if the purchasers cross state lines. Moreover, violation of the FDCA is a strict liability  offense; a seller’s ignorance of the purchaser’s out-of-state status would presumably be irrelevant. This effectively places the burden on the [existing] medical cannabis business to ensure that transactions are purely intrastate.  
  • Exclusive FDA Oversight Would Impose Insurmountable Compliance Costs for Existing Operators. Small businesses, MWBEs and social equity licensees are already struggling with access to capital and financial services. Compliance with the FDCA and FDA oversight would not be possible for most: 
  The new drug research and development process is notoriously expensive and risky. For a new chemical entity, it can take ten to twelve years and cost more than $1 billion. Prior and longstanding use of cannabis for medical and non-medical purposes may reduce some of the risk, for instance, by identifying promising uses and suggesting the appropriate dosing. Also, the agency’s flexibility with botanical NDAs may reduce some of the cost, where it applies. Pursuing new drug approval for medical cannabis after descheduling [or rescheduling] could, however, still cost hundreds of millions of dollars. This will put the process out of  reach for most entities currently providing medical cannabis. Yet avoiding the new drug approval process is not an option; medical claims on any product in interstate commerce will trigger the FDA’s new drug authorities and require an approved NDA. Additionally, the NDA-related costs triggered by the assertive application of the FDCA’s “drug” definition would be just the beginning. Such costs would also include compliance with “current good manufacturing practices” (cGMP) as well as drug packaging and labeling requirements: “Drug” status under the FDA framework would trigger a variety of regulatory requirements. For instance the manufacturer would be required to comply with “current good manufacturing practices” (cGMP). The FDA’s cGMP regulations impose requirements relating to the creation and training of a quality control unit, design and features of any buildings and facilities used, design and maintenance of equipment used, production and process controls, and recordkeeping, among other things. Failure to comply with current cGMP would render the product adulterated and could expose the company to enforcement action, including criminal prosecution. Also, the FDA would have jurisdiction over the product’s “labeling,” meaning any “written, printed, or graphic materials” associated with the product…. The agency could also take enforcement action if any labeling–written, printed, or graphic materials–were “false or misleading in any particular.” This would include taking action if the labeling omitted material information, such as the consequences from customary or usual use of the product. Again, these rules would apply simply because the product bore a medical claim and therefore became a “drug”–no matter what form the product took.   
  1. Unfair Competition from the Pharmaceutical Industry. To date, Schedule I and II penalties have operated as formidable (though not insurmountable) barriers to entry for pharmaceutical companies exploring the development of cannabis-derived drugs. Even without the benefit of rescheduling the FDA has already approved one CBD-derived drug and two synthetic THC drugs. Removing those penalties could open the floodgates to new drug applications for much needed cannabis-derived drugs, but also rampant attempts to use new drug applications to fence-in and squat on specific cannabis constituents. Such attempts could prevent state-license cannabis operators from the interstate production and sale of whole plant products (on the grounds that they are unapproved “drugs”), and also foreclose alternate regulatory pathways to the interstate market such as the FDA’s “dietary supplement” designation.  
 
  • Ban on Interstate Sale of Cannabis-Infused Edibles. As stated above pharmaceutical companies could make novel medical claims about various cannabis constituents, invoking the FDCA’s new drug approval process and the FDA’s sole authority over “drugs,” making it potentially unlawful for a state licensed cannabis operator to sell their wares outside of their state. For example, once a cannabis constituent is deemed a “drug” under the Food Drug and Cosmetic Act, it may no longer be used as an ingredient in a food or beverage, and even without the “drug” designation, alternate regulatory pathways provided by the FDCA may not be readily available to cannabis-infused “edible” products:
  [T]here are also substantial impediments to simply adding cannabis, or an extract from cannabis, to a conventional food such as a cookie, candy, or beverage. These impediments include the rule that foods cannot contain new drugs (the drug exclusion rule) and the fact that, as a single ingredient among many, cannabis (and a cannabis constituent) would probably be deemed a “food additive” requiring premarket approval.  This would effectively block cannabis-infused edibles in the interstate market by preventing the introduction of goods from currently state licensed cannabis operators into the stream of interstate commerce.    
  • RESCHEDULING TO SCHEDULE III WITH GUARDRAILS: Carving “Whole Plant” Cannabis Products Out of the FDCA Definition of “Drug”
  Given the limited benefits and potentially lasting repercussions, we should not consider rescheduling in isolation, without also evaluating guardrails for protecting the existing state-licensed cannabis enterprises. Specifically, existing operators would need (at a minimum) a carve-out for “whole plant” cannabis products so that they (and the naturally occurring cannabinoids and other components of them) cannot be deemed “drugs” under the FDCA.    
  • Existing FDCA Categories Are Inadequate to Capture “Whole Plant” Cannabis. This is not only warranted given the potentially dire industry consequences outlined above, but also as a matter of regulatory clarity and consistency. “Whole plant” cannabis products require their own category because, even if the FDA deems them to be “drugs” under the FDCA, they would still fail to meet the requirements for FDA approval of either a small molecule drug or a botanical drug—potentially leading to the eventual exclusion of such “whole plant” cannabis products from lawful interstate markets:
  [G]iven the high degree of reproductive variability of cannabis… it is unlikely that the psychoactive part of cannabis in its natural state, and the way in which it is traditionally rolled and smoked, would give anywhere near the predictable and quantifiable product and clinical test results needed to satisfy the FDA under the NDA process. [T]he botanical NDA framework does not apply to drugs containing highly-purified substances simply derived from naturally occurring sources. Many commonly-used drugs contain active ingredients derived from plant sources and subsequently are highly processed and purified. The FDA gives the example of paclitaxel, originally derived from an extract of the yew tree. The agency does not consider these botanical drugs…. Likewise, a highly processed and purified drug derived from an extract of the cannabis plant does not enjoy the same flexibility that attaches to drugs the FDA deems botanical. Furthermore, we need this “whole plant” carve-out from the definition of “drugs” not only to permit existing state-licensed medical cannabis providers’ access to interstate and international cannabis markets, but also to assure this access for state-licensed adult-use cannabis businesses as well. Without it, access to markets could be threatened by the FDA’s potential inference of drug claims from widespread customary use of cannabis for every-day maintenance of mental health and wellness:  Cannabis flower might simply be sold for recreational smoking. Purely intrastate transactions (in which the cannabis is grown, sold, and smoked within one state) would not trigger the FDA’s jurisdiction. This is true even if the seller made claims about using the cannabis to treat a disease or other health conditions. There is a solid argument that interstate transactions of cannabis only for recreational smoking also would not trigger the FDA’s jurisdiction…. It is also possible the agency would find an intended drug use even without claims–based on the company’s knowledge of actual use in the market or perhaps its design.  
  • A Carve-out for “Whole Plant” Cannabis Products Improves Previous Industry Proposals Premised on Descheduling. Note that the proposed carve-out from the FDCA definition of “drug” is consistent with the position taken in the National Cannabis Industry Association Policy Council’s October 2019 white paper “Adapting a Regulatory Framework for the Emerging Cannabis Industry,” but offers a more comprehensive solution than the narrow carve-out proposed suggested in the white paper. The authors of the white paper prescribe a federal regulatory structure in the event cannabis is descheduled and removed from the DEA’s review entirely.  The white paper thus suggests a carve-out permitting existing state regulatory agencies to police structure/function claims made by high-THC cannabis products (i.e., claims that make such products “drug” claims) and permitting such products to make dietary supplement-type claims for medicinal cannabis products, but would not exempt any “whole plant” cannabis products entirely from the category of “drugs” under the FDCA. The expanded carve-out proposed herein has more beneficial downstream effects, including obviating criminal prosecutions for the violations of the FDCA discussed above, and would apply to both medicinal and adult-use cannabis products.
  Additionally, in order to make the carve-out proposed herein optimally effective, it should also explicitly assign the primary role for regulatory enforcement to existing state cannabis regulatory agencies. This would be another departure from industry recommendations in the white paper, which prescribe the primary regulatory role to the FDA and TTB (but only after descheduling) while relegating state regulators to overseeing the retail market alone. Importantly, adopting the proposed carve-out from the FDCA definition of “drugs” would not preclude transitioning to the more robust federal regulatory framework envisioned in the white paper post-descheduling.  The carve-out proposed here would essentially freeze the status quo  in that respect, leaving state cannabis regulators free to continue police structure/function claims and prohibit (or permit) other health-related claims. This would provide much needed breathing room and the time for both Congress and the states to determine whether to adopt a framework similar to that suggested in the white paper (which presumed descheduling), or a state-lead regulatory regime (not unlike that currently observed in the insurance market) wherein federal regulators merely set a “floor” for cannabis warning symbols, minimum labelling and packaging standards and other consumer protection standards. In either case, uniform national standards would still need to be promulgated and adopted in order to smooth the transition to interstate commerce while protecting public health and consumer safety. Adopting the proposed carve-out would make that outcome more likely than rescheduling without the carve-out from the FDCA definition of “drugs”.    
  • A Carve-out for “Whole Plant” Cannabis Products Doesn’t Preclude Pursuing Complementary Protective Measures. Some argue that the FDA is not actually interested in regulating “whole plant” cannabis products, and that this is much ado about nothing. If that is the case, one would expect the FDA to support the proposed statutory carve-out, so that the industry has the assurances of FDA non-intervention in writing which carries the force of law. Others argue that such a carve-out might prevent FDA from authorizing studies using “whole plant” cannabis, which is a legitimate concern; but this concern can likely be accommodated within the language of the carve-out itself. Still others, while acknowledging the potentially looming issues with FDA jurisdiction and enforcement, argue that obtaining executive agency guarantees of non-enforcement (ala the Cole Memo) may be sufficient on its own, or when combined with Congressional action to tie the purse strings on enforcing the FDCA against “whole plant” cannabis (ala the Rohrabacher Amendment). This is a viable alternative in the short term; however, executive agency forbearance does not offer a permanent solution, as Attorney General Sessions demonstrated when rescinding the Cole Memo.
  Adopting a statutory carve-out from the FDCA definition of “drug” for “whole plant” cannabis would protect the state-sanctioned industry while still allowing more research to flourish if cannabis were rescheduled to Schedule III. Absent the addition of explicit safe harbors for “whole plant” cannabis goods sold by existing state-licensed cannabis businesses, rescheduling could inadvertently facilitate the pharmaceutical industry’s monopoly over the interstate and international cannabis markets.   Please See PDF For Sources Cannabis Cannibalism & Rescheduling Risks (Khoja 05-28-23)   Author Contact Details
Khurshid Khoja Principal mobile +1 510 682 6892 khurshid@greenbridgelaw.com
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