By Hilary Bricken, Principal at Harris Bricken
It’s no secret that state cannabis markets across the nation are suffering badly. Because of I.R.C. 280E, lack of access to financial institutions, massive operational expenses, plunging prices, and just gluts of production, it’s not pretty out there. However, there’s a newish light at the end of the tunnel, at least for California and other states that are game: interstate cannabis agreements. If interstate cannabis agreements open up between cannabis states, then maybe just maybe the cannabis industry can be pulled back from the brink of its hard landing in 2023.
Recall in September of last year, Governor Gavin Newsom signed Senate Bill 1326 into law (and it became effective on January 1 of this year), introducing the possibility of interstate cannabis agreements. California wasn’t the first state to do this. Oregon actually did it in 2019. Under SB 1326:
MAUCRSA specifies that its provisions shall not be construed to authorize or permit a licensee to transport or distribute, or cause to be transported or distributed, cannabis or cannabis products outside the state, unless authorized by federal law. This bill would make an exception to the above-described prohibition and would authorize the Governor to enter into an agreement with another state or states authorizing medicinal or adult-use commercial cannabis activity, or both, between entities licensed under the laws of the other state or states and entities operating with a state license pursuant to MAUCRSA, provided that the commercial cannabis activities are lawful and subject to licensure under the laws of the other state or states.
Pursuant to SB 1326, these interstate cannabis agreements would be between states. Not licensees. Licensees would still need to engage in contracts with each other for the actual import, export, and distribution of cannabis across state borders. Governor Newsom would be able to enter into these interstate cannabis agreements with governors from other states so long as:
Under SB 1326, the interstate cannabis agreement also requires that the contracting state agree that its cannabis licensees be bound by California’s requirements around public health and safety, track and trace, testing, inspection, packaging and labeling, and adulterated and misbranded cannabis. The contracting state must also impose “restrictions upon advertising, marketing, labeling, or sale within the contracting state that meet or exceed the restrictions” in California for the same. And all California taxes apply, too.
Further, out of state licensees (“foreign licensees”) cannot engage in commercial cannabis activity in California “without a state license, or engage in commercial cannabis activity within a local jurisdiction without a license, permit, or other authorization issued by the local jurisdiction.” So, foreign licensees will also be plagued by California’s local control issues if they seek to do business in one of our cities or counties that allows for commercial cannabis activity.
Interstate cannabis commerce would be a dream for many licensees, and especially this kind of interstate commerce which would only: (a) be between cannabis states; and (b) involve existing state licensees (and not, let’s say, Costco or Amazon (yet)). But the passage of SB 1326 didn’t automatically create interstate cannabis commerce for California licensees. In fact, it’s creation is dependent upon:
As reported by Politico last week, the DCC is going for option 4, which is really the only realistic choice right now. In an eight-page request and de facto legal brief, the DCC asks the State Attorney General’s office for an opinion in regards to whether interstate cannabis agreements will result in “significant legal risk” to the state, given that cannabis remains an illegal Schedule I controlled substance under the federal Controlled Substances Act (“CSA”).
To assist the State A/G with this request, the DCC articulates three legal arguments as to why California won’t ever feel the heat from the feds if Governor Newsom starts signing interstate cannabis agreements:
As I see it, the DCC is really hanging its hat on states’ rights and dual sovereignty in pushing the State A/G to opine that there’s no “significant legal risk” to California because of SB 1326. The anti-commandeering doctrine is not actually present in the Constitution, itself, though. The U.S. Supreme Court created the doctrine based on the 10th Amendment in two cases, New York v. United States in 1992, and Printz v. United States in 1997. The most recent application of the doctrine came in the 2018 decision in Murphy v. NCAA regarding New Jersey’s commencement of legal sports betting despite federal prohibition of the same. The U.S. Supreme Court sided with Jersey, ruling that “Congress may not simply ‘commandeer the legislative process of the States by directly compelling them to enact and enforce a federal regulatory program.”
I think the DCC is right about the anti-commandeering principle. I think the weakness though is around interstate commerce, and the DCC can’t ignore the 2005 Raich case, which holds that Congress’ Commerce Clause authority includes the power to prohibit the local cultivation and use of cannabis in compliance with California law.
The DCC likely rightly points out, however, that the foregoing doesn’t matter for the State. The State and its officials are highly unlikely to be prosecuted for anything at all. At most, the federal government might sue California to try to overturn SB 1326 (although I don’t see that happening under President Biden’s DOJ). Private citizens are the ones who will be on the line for enforcement because California wouldn’t act if the feds started punishing people for moving inventory under SB 1326 (that’s also why no positive conflict exists).
I think even if the DCC is successful in getting a positive opinion from the State A/G, what really matters is what enforcement by the DOJ (which is essentially controlled by the U.S. Attorneys in each District) looks like for private cannabis enterprise. In all, interstate cannabis agreements may be a political win for California, they will mean nothing if the DOJ doesn’t also play ball when it comes to enforcement.
Re-published with the permission of Harris Bricken and The Canna Law Blog
Hilary Bricken is a partner with the law firm Husch Blackwell, where she advises clients in the cannabis, healthcare, and life sciences spaces on transactions, regulatory compliance, governance matters, and other corporate needs. Hilary may be reached at [email protected].
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