The Dentons Cannabis Group believes that HHS’s recommendation to reschedule cannabis from schedule I to III is a significant step to harness the plant’s potential to improve health and wellbeing and in the legalization of cannabis long term. Following this recommendation, we expect that: (1) DEA is likely to reschedule cannabis to schedule III; (2) The federal government’s acknowledgement of cannabis’s generally accepted medical uses and lower risk profile will open avenues to cannabis and cannabinoid research in the United States and internationally; (3) rescheduling would eliminate the negative 280E tax implications and in turn significantly, positively improve state legal operators’ profit margins, creditworthiness, and attractiveness for investors; and (4) rescheduling would not negatively impact state legal programs in the near term.  Below are ten of the most common “misconceptions” we have seen or heard from stakeholders and the media in the days following the news of HHS’s recommendation.

1. MISCONCEPTION: Rescheduling to III would legalize state activities.

RESPONSE:  The recommendation to reschedule cannabis (“marihuana” in the Controlled Substances Act (“CSA”)) from schedule I to schedule III is significant because the federal government is acknowledging, after decades of denial, that cannabis has medical value and less potential for abuse than certain other controlled substances.  If the DEA does reschedule cannabis to schedule III, cannabis will remain a controlled substance and be subject to the CSA’s requirements for registration with the Drug Enforcement Administration (“DEA”), manufacture and distribution.  The state law programs to regulate and tax cannabis would still exist outside of the federal system, and there is no immediate way for current state actors to enter federal legal channels for the distribution of controlled substances; – for example, even when DEA allowed for additional bulk manufacturers for cannabis research, it suggested that state growers would not be selected on the basis of their federally illegal cannabis activities.  Instead, we expect that the state programs would continue as they have been, outside of federal legality but “protected” by current federal nonenforcement.  Perhaps over time states would amend laws to seek to harmonize with federal law.

2. MISCONCEPTION: Rescheduling to III will eliminate the state programs.

RESPONSE:  Currently, state-legal programs operate outside of federally legal channels for controlled substances.  Rescheduling cannabis to schedule III would not change that.  We do agree that in the long term, if cannabis-based drugs are ultimately approved through traditional pharmaceutical channels, medical cannabis programs may become smaller or even potentially fade away (especially if cannabis flower could be prescribed and reimbursed).  We would still expect adult use markets to continue in the near term in some manner outside of the CSA pathway, though the precise mechanism for how that will occur in the longer term is unclear.  The most likely way would be a congressional act descheduling all or a subset of cannabis products and regulating this subset in a manner similar to tobacco or alcohol or other consumer goods intended for inhalation or ingestion.  While acknowledging that increased federal enforcement is possible, we find that scenario unlikely given the state legal cannabis markets’ history and size.

3. MISCONCEPTION: Rescheduling to III will eliminate state medical cannabis.

RESPONSE:  Rescheduling to III is an acknowledgement of the success of the state-based medical programs.  While, we do acknowledge that state medical cannabis programs could be diminished or even cease to exist in the long run, that is not certain or inevitable. If cannabis-based drugs are ultimately approved through traditional pharmaceutical channels, a process that will take years, medical cannabis programs may become smaller or even potentially fade away (especially if cannabis flower could be prescribed and reimbursed).  If flower cannot be prescribed or reimbursed under federal law, we could imagine a scenario where medical programs would continue, at least as discounts in the state adult-use markets.

4. MISCONCEPTION: 280E will still apply to state cannabis-related activities.

RESPONSE:  This is simply incorrect. 280E states that: 

No deduction or credit shall be allowed 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) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.

If cannabis is moved to schedule III, 280E by its plain language will not apply to cannabis.  The contention that moving cannabis to schedule III does not eliminate 280E for recreational cannabis is incorrect.  That confusion likely arises from the separate point that moving cannabis to schedule III does not make recreational cannabis “legal.”  That is correct, but incomplete; the real point is that rescheduling does not make any current state program, medical or recreational, legal under federal law.

5. MISCONCEPTION: Rescheduling to III “hands the entire industry to Big Pharma.”

RESPONSE: While a rescheduling would not make the state programs legal, we expect state programs to continue, at least for recreational/adult-use cannabis.  The change would open the window for pharmaceutical companies to compete with state-legal cannabis medical products using the traditional schedule III drug pathways (note, cannabis drugs could be researched and developed even with cannabis in schedule I, but schedule I substances have significant higher barriers, and such developments have been rare).  These pathways still take time (years), and particular drugs will have to be developed for particular uses (e.g., MS, Crohns). 

6. MISCONCEPTION: FDA is rescheduling medical cannabis, but it cannot reschedule recreational cannabis.

Response:  This is incorrect.  Rescheduling or descheduling impacts the cannabis plant, not the intended use.  It is true that a move to schedule III would not make adult-use legal because it would still be a controlled substance sold inconsistent with federal law.  Medical use would not be immediately legal, and it is not apparent how, whether, or when doctors would be legally able to prescribe cannabis or cannabis derived products (currently, doctors do not “prescribe” cannabis under state laws; generally they issue “certifications” that a person is a bona fide patient with one of the enumerated ailment for which the state or the doctor believes cannabis may provide some relief or benefit).

7. MISCONCEPTION: Moving cannabis to schedule III will relax other regulatory burdens like quotas and security requirements.

RESPONSE:  While schedule III drugs traditionally do not have such measures, to move cannabis to schedule III and comply with the requirements under the Single Convention, the DEA would have to add regulations specific to cannabis, including quota requirements and certain security regulations (consistent with what the DEA did with Marinol® and Epidiolex®).

8. MISCONCEPTION: Rescheduling will help/hurt congressional reform efforts

RESPONSE:  Maybe yes, maybe no.  While rescheduling would bolster arguments that cannabis has therapeutic value, which could move politicians on the fence, it also could remove some of the urgency with certain politicians seeing rescheduling as “good enough.”  It is too soon to tell what impact this would have on legalization efforts, but SAFE Banking is still necessary, and adult-use cannabis would need to be descheduled or state programs otherwise legalized for the industry to continue to succeed long term.

9. MISCONCEPTION: If DEA chooses to reschedule cannabis, it must use “Notice and Comment” rulemaking to do so

RESPONSE:  While this is the likely route, the DEA has espoused in the past that it can forego notice and comment if issuing rules to comply with treaty obligations (see 21 USC 811(d)(1), which allows DEA to take actions to comply with international treaties).  Therefore, the DEA could instead issue a final order without notice and comment.  It has done this at least once with Epidiolex® rescheduling (although not with Marinol® or the new bulk manufacturing regulations).  We do still suspect that proceeding with notice and comment is more likely given the public and political interest in the topic and the historic importance and implications of rescheduling, although politics could impact the decision and timing.

10. MISCONCEPTION: Rescheduling will allow significant new investment/property owners to lease to cannabis companies/cannabis companies to file for bankruptcy

RESPONSE:  The challenges related to investing in, leasing to and bankruptcy protection for cannabis companies are based on the federal illegality of the activity, not necessarily the substance. Whether cannabis is schedule I or schedule III, the state programs as they exist today still operate outside of federally legality.  As such, the impact rescheduling will have in these matters will come down to whether banks, landlords and bankruptcy judges in their own discretion determine that federal illegality is no longer a bar to such activities.