Why the Cannabis Industry Should Be Relieved the DEA Didn’t RescheduleAdam J. Detsky & Carlos E. ProvencioAugust 25, 2016
These investors and insurers held dreams of unbridled access to enormous growth potential and revenue streams. When news came in early August 2016 that the DEA would not reschedule, those dreams were dashed. But was the decision bad news? The answer is, “Not really.”
In reality, the DEA’s decision is a win for existing cannabis businesses and provides comfort for those who are already profiting or already invested in the industry. The smaller businesses, the cultivators, the licensed distributors, and the companies financing them or investing in them could find themselves in a more profitable position.
Had cannabis been rescheduled, states would have had to wrestle with the tight regulations of the Food and Drug Administration (FDA). An FDA review of a product can take years to complete, and no one knows particularly to what extent testing would be required. This is an issue because so many growers, sellers, and infusers rely on cross-breeding, and these companies take a more active interest in protecting their intellectual property – and how it is presented. Would every strain need FDA approval? Every infused product? How would an ongoing FDA review affect a business’s ability to sell or market its product? How would it affect labeling requirements and the sale of medical strains or products? FDA reviews have been known to cost millions of dollars. Costs would skyrocket to the point that regulatory costs would force many, if not all, small businesses out entirely.
In all likelihood, rescheduling would have dramatically increased costs for smaller players, potentially pushing them out of business. Pharmacies would be in a position to sell the product. In locations where existing laws prevent pharmacies from selling the product, lobbyists would soon be swooping in. And if the FDA opted to apply their standards rigidly, big businesses would be in a position to crush the small businesses. Resale values of the businesses and licenses would decline as a result, as big pharmaceutical companies would have no need to buy out those companies — they could force these small businesses into closure with little to no effort.
Now, states will not have to face the resulting questions about whether to enforce the far more restrictive federal rules of Schedule II — an issue that had the potential to cripple the medical marijuana (MMJ) industry.
Schedule II drugs cannot be refilled. A new prescription must be issued in ink and physically presented to the pharmacist every time it is ordered. The 25 states that have allowed marijuana/CBD use to various extents would have had to align their laws with the federal requirements. Perhaps most alarming and least easily dismissed: Since the DEA and FDA would be regulating cannabis as a Schedule II drug, preemption claims would have become more viable — unless the states affected adapted to the requirements for Schedule II drugs. Sellers, cultivators, investors, insurers, and others in the industry can breathe a sigh of relief in this regard.
The decision wasn’t so much the closing of a door as it was an affirmation of the status quo that allowed investors and insurers to put many of their fears to rest. For the foreseeable future, their investment does not have a legal guillotine looming over it controlled by big business or the DEA. The DEA made it clear in the public relations blitz accompanying the announcement that marijuana is simply not on its priority list. The nation is facing a surging opioid epidemic and increases in the use of heroin, fentanyl, meth and, cocaine. For now, the DEA ruling changes nothing but rather confirms that a well-regulated cannabis industry will not be its target. There remain no known instances of the DEA prosecuting those who invest in, finance or insure the industry.
Additional good news comes in the form of permitting legitimate research regarding marijuana. While there is some research out there, the vast majority of these so-called studies fall short of the extensive testing and monitoring requirements that the FDA and the DEA have traditionally required.
Yes, state-legal marijuana businesses will continue to be denied the same tax deductions that are afforded to other business (see tax provision 280E), and, yes, businesses, investors, and landlords still have some reason to fear a federal crackdown on cannabis cultivation and sale. But so long as states continue to pass strong regulations and businesses stay in full compliance with those regulations, investors and insurers can put aside fears that their investments will lose value in the foreseeable future — and that is a win for all.
Adam J. Detsky is a Wilson Elser litigation attorney practicing in Colorado and New York. He chairs the firm’s Cannabis Risks group.
Carlos E. Provencio is an experienced litigator and in-house counsel who litigates cases in a broad array of subject areas and counsels clients on corporate risk avoidance, privacy, and electronic discovery.