Yesterday’s Marijuana Rescheduling News, Explained

Yesterday, some big news dropped that the cannabis industry has anticipated since last summer. I take issue with some of the headlines, so here’s mine: “DEA Reportedly Agrees to Initiate Proposed Rulemaking to Reschedule Marijuana…”. Clearly, I’m a lawyer and not a reporter, but the “Reportedly” and “Initiate Proposed Rulemaking” are key considerations here at the Canna Law Blog.

How did we get here?

In October of 2022, President Biden requested that the Department of Health and Human Services (HHS) review marijuana’s placement on Schedule I of the Controlled Substances Act (CSA). HHS followed that directive, recommending on August 30, 2023, that marijuana be moved to Schedule III. My real-time analysis of what a Schedule III placement would mean can be found here. I’m not going to re-type much of that analysis today; but I stand by all of it, and I encourage you to click that link when you’re done.

What’s the next step?

I mentioned above that DEA “reportedly” has agreed to follow the HHS proposal. The very next step will be for DEA to confirm that reporting. We are likely to see a statement or press release, and a notice of proposed rulemaking should issue. Here’s an example of what that looks like, from a recent DEA rulemaking on prescribing controlled substances via telemedicine. I trot out that particular example because DEA received “a record 38,000 comments” on those proposed rules. In my estimation, the marijuana industry does more complaining than lobbying, but I’ll put the over/under on marijuana comments at 3x telemedicine.

How long will rulemaking take?

I don’t pretend to be an expert on the Administrative Procedure Act. I can safely say, though, that much of this depends on exactly what rule or rules DEA proposes, and when. Right now, it’s reported that DEA has a draft rule out to the Office of Management and Budget for review. That process can take up to 90 days.

Once the rule is published, please know that DEA may extend timelines as ostensibly needed. For example, in the telemedicine rubric above, DEA and a related agency extended a temporary set of rules for a six-month stretch while DEA waited to instate its proposed final rule (the one that drew so much interest). Finally, even if DEA attempts to move briskly, I’ve mentioned the possibility of litigation and challenges to rulemaking. Someone is likely to sue.

Are you saying rescheduling may not take effect before the Presidential election?

Yes I am. In fact I doubt cannabis will be on Schedule III by November. And by extension there is always a possibility, however remote, of DEA backtracking on this reported decision. A reversal along those lines would be legally problematic, for what it’s worth. The CSA is clear that while the DEA maintains final authority to reschedule marijuana, HHS’ recommendations “shall be binding … as to [] scientific and medical matters.” I do believe marijuana to Schedule III will happen.

What about the Office of Legal Counsel?

Don’t even ask.

What’s the biggest win for industry if/when marijuana moves to Schedule III?

It has got to be tax relief. Taxes all the way. I explained in my August 30 post why springing the vise of IRC § 280E won’t fully cure the tax headaches faced by cannabis businesses, and why cannabis businesses still won’t be taxed like other businesses on a Schedule III status. But, wow!, a lot of these companies are going to see better margins overnight. Many will also find relief from thinking so hard about dicey, new-fangled tax avoidance propositions.

What are some other cannabis law markers?

There are quite a few. A New York Times article from yesterday mentions, in passing, the possibility of “softening of other laws and regulations that account for the use or possession of cannabis, including sentencing guidelines, banking and access to public housing.” I agree with all of that. However, a move to Schedule III appears less helpful for other, businessy areas, e.g. bankruptcy, trademark.

What would this mean for state-legal cannabis markets?

I got this question from a client yesterday (Hey Tom!). The answer is, “not a lot.” This is because interstate commerce will still be verboten under Schedule III. Yes, the likelihood of federal enforcement against state-licensed marijuana businesses will decrease (from FDA, DEA, wherever); but enforcement probabilities are vanishingly low already– at least with respect to basic business activity. Again, I think the benefits of Schedule III will be more on the tax treatment side, which should lead to ancillary benefits, like lower costs of capital.

If marijuana goes to Schedule III, will it stick?

My guess is it would, as a purely administrative matter. By that I mean that HHS and DEA wouldn’t revisit the plant’s status anytime in the next decade or two. That said, Congress could always intercede. Congress has the power to remove marijuana from the CSA entirely, at any time and for whatever reason. Someday, when marijuana is finally descheduled entirely — and treated at least as respectfully as cigarettes, alcohol, sugar etc. — we will have Congress to thank, not the D.C. cops or scientists.

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Stay tuned to the Canna Law Blog — and stay off social media — for developments here as they ensue. For previous posts on this topic, check out the following: