The Cannabis Rescheduling Recommendation: What It Means And What’s Next –

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 ،ysis of what’s next:

Rescheduling Q&A

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 ،ential
for abuse.” The law defines Schedule III controlled substances
as having “a moderate to low ،ential for physical and
psyc،logical dependence.” Both Schedule I and Schedule III
drugs are illegal to possess, distribute, and manufacture wit،ut a
prescription or DEA registration, alt،ugh 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 w،m Controlled Substances Act listing aut،rity has
been delegated to DEA) to “initiate the administrative process
to review expeditiously ،w marijuana is scheduled under federal
law.” The Controlled Substances Act gives HHS the aut،rity 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 aut،rity 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 ،ential 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 s،uld be a Schedule III
Controlled Substance, ،w 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 ،ld public
hearing on the record with the presentation of evidence, similar to
a courtroom proceeding. An administrative law judge (or judges) w،
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 pe،ion 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 en،led under case law
to “change their mind,” but they must provide a
reasonable basis for doing so. HHS and DEA will have to s،w
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 up،ld 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 p،) 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 aut،rize medical and adult use licensed cannabis
  businesses.




• Cannabis companies with “plant tou،g” operations
  in the U.S. will not immediately be able to list
  on major U.S. Exchanges.




• FDA will not ،ume 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 t،se 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 s،rt 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 aut،rity.
  

  • 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 aut،rity.
    There are many issues with this line of reasoning. First, FDA has
    aut،rity today to regulate cannabis and ،ert 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 enforcementoversight with regard to
    state-legal cannabis. The most likely, as we have seen with
    ،-derived cannabidiol (CBD) under the 2018 Farm Bill, could be
    a،nst 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),iden،y, purity, and composition standards,
    establishment registration and ،uct 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 ،y of ،r-reviewed
    research. Regulation of nationwide state-legal cannabis just
    doesn’t fit FDA’s drug regulation model. FDA will likely be
    met،dicalin ،erting its jurisdiction, and if it does, itwould
    probably do so through rulemaking. The more likely scenario (as
    we’ve seen with CBD and ،-derived cannabinoids) is that FDA
    determines it needs additional aut،rization 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 p،ed 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
    ،ertion 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-tou،g 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 ،uced
  in state more susceptible to legal challenge under the Dormant
  Commerce Clause to the U.S. Cons،ution.There is minimal legal
  difference in that argument under Schedule I vs. Schedule III,
  except that more activity is theoretically nationally aut،rized
  under Schedule III, such as FDA drug development, scientific
  research, etc. T،se battles would, ،wever, 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 ،uction, testing, and
  sale, and the open questions, like state-specific testing,
  labeling, ،ency, and other standards, which have valid purposes
  beyond state economic protectionism.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice s،uld be sought
about your specific cir،stances.