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What Reclassified Cannabis Really Means for Your Business

The U.S. Department of Justice’s Drug Enforcement Administration (DEA) has officially made the move to reclassify cannabis from a Schedule I to a Schedule III drug under the Controlled Substances Act (CSA). The decision follows a similar recommendation from the U.S. Department of Health and Human Services in August 2023.

Attorney General Merrick Garland drafted the initial proposal to reclassify cannabis from Schedule I to III. Once the proposal is published into the Federal Register, it will initiate the formal rulemaking process outlined in the CSA, a potentially lengthy path that involves multiple reviews and opportunities for modification.

The rulemaking process includes a sixty (60) day public comment period, during which interested parties and stakeholders are invited to share their questions and concerns about the rule. The Office of Management and Budget will also review the rule while an administrative law judge reviews the proposal. Congress will then have the opportunity to modify the rule, but to do so would require a supermajority vote in both chambers. Additionally, subsequent regulations, rules, and policy guidance are likely to follow in the months following the formal reclassification of cannabis.

The DEA’s move is historic, representing the single most significant shift in federal cannabis policy since cannabis was first declared illegal in 1937. But what does this change really entail for businesses and individuals?

What Reclassification Generally Means:

Once reclassified, cannabis will join other Schedule III drugs like ketamine, testosterone, and Tylenol with codeine, capable of being prescribed or recommended by a licensed and qualified physician or healthcare provider. For most consumers, individuals, and businesses, this will be the most significant consequence of reclassification. In addition, every employer will need to evaluate their HR policies and procedures to determine how reclassification may affect their employees and operations.

Reclassification also removes the barriers imposed by § 280e of the U.S. tax code, which prohibits medical cannabis businesses from claiming tax deductions or credits, thereby reducing their financial burdens significantly. Medical cannabis businesses will also experience greater access to financial institutions and capital.

In addition, opportunities for research and clinical studies regarding cannabis will significantly increase. Researchers and medical institutions will likely be able to obtain grants and stipends more easily for cannabis research.

The reclassification process is expected to take a year or more pending administrative review and legal challenges.

What Reclassification Means for State Cannabis Laws:

On a practical level, very little is likely to change in each state’s cannabis programs.

The DEA’s rescheduling efforts do not necessarily establish a comprehensive federal regime for medical cannabis. As such, while subsequent rules and regulations will aim to provide additional clarification and guidance on specific topics such as research, the DEA will likely continue to leave regulation of medical cannabis primarily to the states. In other words, it is unlikely that the DEA’s rule change will preempt or invalidate existing state medical cannabis laws already on the books. Instead, it will remove the existing conflict between federal and state laws relating to medical cannabis.

Adult-use, or recreational cannabis, laws present a murkier issue. The reclassification of cannabis as a Schedule III drug will not make cannabis legal for recreational purposes. Nonetheless, the federal government has largely taken a policy of nonintervention with regard to state adult-use cannabis programs, and this policy is likely to continue. As such, existing state adult-use cannabis programs should continue in a manner similar to the past few years.

What Reclassification Means for Businesses:

Simply put, reclassification of cannabis equates to greater lawfulness and legitimacy. This means that businesses partnering with compliant medical cannabis entities can do so with greater confidence, and without fear of reprisal from the federal government.

As such, existing businesses may seek to expand their current goods and service offerings to the medical cannabis industry. Businesses should be sure to conduct extensive due diligence on potential partners in the medical cannabis space, to ensure compliance with applicable state and federal laws.

The highly regulated nature of the cannabis industry also presents opportunities for enterprise support companies, including banks, payment processors, and tax and accounting professionals, who will now be able to lawfully work in conjunction with medical cannabis businesses and provide professional services that were previously mired in legal limbo.

What Reclassification Means for Employers:

Significantly, after reclassification employees of all businesses may be eligible to be prescribed or recommended federally lawful medical cannabis. Individual eligibility will depend on their particular qualifying condition and applicable state law. This means that every business, regardless of industry, will need to develop and integrate a cannabis use policy companywide in conjunction with their other policies and procedures.

Additionally, under its new classification, medical cannabis may potentially qualify as a “reasonable accommodation” in certain circumstances under the Americans with Disabilities Act (ADA). While this area remains uncertain pending future developments and guidance, it is likely to be an area fraught with concern and legal minefields for employers.  Those seeking to avoid litigation should consult with experienced counsel to evaluate their recordkeeping and disciplinary procedures and ensure their ADA procedures are up to date.

Information pertaining to an employee’s medical cannabis usage will need to be treated as confidential and proprietary trade secret information requiring extra safeguards, as well as protected health information. Employers should review their record retention, upkeep, and disposal requirements to ensure compliance with applicable laws.

Businesses should also ensure that employees using medical cannabis are not eligible for safety-sensitive positions, such as working with hazardous materials or driving with a CDL license.

What Reclassification Means for Cannabis Businesses:

Cannabis businesses should take the opportunity to review and analyze their internal policies and procedures, including but not limited to those related to security, organization, operations and management, and finance.

The reclassification of cannabis also introduces tremendous new opportunities for cannabis businesses. Enhanced access to market capital, financial institutions, and (perhaps most significantly for the industry) tax breaks and concessions, present the opportunity to expand both reach and profitability. Cannabis businesses may also be entitled to greater protections for trademarks and other IP concerns. Consulting with experienced counsel in advance of the DEA’s reclassification can help cannabis companies proactively position themselves to take advantage of the new federal landscape.

Medical cannabis companies may also be able to engage in more extensive marketing efforts.  Currently, major social media platforms including Facebook Pinterest, limit the types of cannabis content that may be displayed due to the current status as a Schedule I drug.  Following rescheduling, these restrictions are likely to be loosened. Cannabis companies seeking to increase their advertising and marketing efforts should be sure to ensure compliance with applicable consumer protection rules, particularly with regard to performance and health claims, in order to avoid regulatory scrutiny.

Finally, greater access to research is also likely to impact cannabis businesses and products. Additional studies will provide more insight into aspects of cannabis like minor cannabinoids and flavonoids, which will in turn influence product offerings. From a marketing standpoint, new research may provide evidence which can be used to substantiate stronger health and medical claims, which have been hampered due to research constraints for Schedule 1 drugs.

What Reclassification Means for Consumers:

Consumers will continue to have access to medical cannabis in a manner consistent with existing state laws. However, consumers will likely be able to use additional forms of payment as various payment processors begin partnering with cannabis companies.

The reclassification also facilitates interstate travel with medical cannabis. This means consumers will be able to travel between states, including via airlines, with valid cannabis prescriptions or recommendations. Federal agencies such as the Transportation Security Administration and Department of Transportation are likely to provide additional guidance on this issue.

Consumers’ access to adult-use cannabis will remain unchanged. Because cannabis continues to be a controlled substance under the CSA, even after rescheduling, it will still be unlawful to buy and sell without restriction at the federal level. As such, state adult-use regimes will continue to operate under a dichotomy of federal prohibition and state legality.

What Reclassification Means for Medical Providers and Networks:

Once cannabis is moved to Schedule III, doctors and physicians will be able to prescribe and/or recommend medical cannabis to patients in a manner consistent with other Schedule III drugs and typical industry standards.

While the federal government is unlikely to set up a comprehensive framework specifically for prescribing medical cannabis, it will likely integrate cannabis prescription processes with existing evaluation and prescription procedures for other Schedule III drugs.

Medical providers should take steps to stay informed regarding medical cannabis and begin and educating themselves on potential treatment options. In addition, practitioners should review and analyze their existing HIPAA, recordkeeping, and CRM procedures to ensure they will be able to seamlessly incorporate medical cannabis into their practice.

Finally, practitioners and healthcare networks should review their existing insurance and vendor agreements to ensure that prescribing or recommending medical cannabis will not cause conflict with any existing contracts.

What Reclassification Means for Hemp, CBD, and Minor Cannabinoids:

Through the 2018 Farm Bill, hemp and hemp-derived cannabidiol (CBD) containing .3% or less THC-9 remain federally legal.  The DEA’s reclassification of cannabis does not alter or disturb any state hemp or CBD-related rules or regulations.

Minor cannabinoids, specifically those products containing cannabinoids other than CBD or THC-9, will remain in a legal grey area. While these products are technically lawful due to their low THC-9 levels, they nonetheless produce an intoxicating effect, and the DEA has issued guidance stating that they view these cannabinoids as unlawful. Reclassification would not change this interpretation, although the DEA might issue additional guidance regarding minor cannabinoids as research regarding these substances becomes increasingly available.

While reclassification is likely to take a year or more to be finalized, businesses can start preparing now for this monumental shift, beginning with a review of their existing policies and procedures, third-party contracts, employment agreements, and other related items.

Each business’s circumstances are unique. We can help! Contact us if you have any questions or concerns about how to navigate the impact of reclassification on your business.

With a practical approach, Chad provides compliance guidance and litigation defense on matters related to cannabis, advertising and marketing, teleservices, and other consumer protection issues.

2560 1707 Walter (Chad) Blackham
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