DOJ Proposes to Reschedule Marijuana (Cannabis) to Schedule III

Legal Background

Following a comprehensive review by the US Department of Health and Humans Services (HHS) on cannabis’s safety and subsequent recommendation to the Drug Enforcement Agency (DEA), the DOJ published an NPRM to reschedule cannabis. Currently, cannabis is classified as a Schedule I drug, which is reserved for substances like heroin and peyote that are considered highly addictive and lacking medical value. The DEA’s decision to reschedule cannabis as a Schedule III drug, indicating a moderate to low risk of dependency, will not legalize marijuana but will mark a significant move towards reducing federal limitations and recognizing the potential for cannabis’s therapeutic and medical benefits.

The Controlled Substances Act (CSA) divides controlled substances into five levels of control, or “schedules,” based on a drug’s potential for abuse, whether the drug has a currently accepted medical use, and whether there is a lack of accepted safety for use of the drug under medical supervision or the level of psychological or physical dependence that could result from abuse of the drug.

Under the CSA, when determining that a drug should be controlled (and if so, under which schedule), the secretary of HHS and the attorney general must consider eight factors set forth in 21 U.S.C. Section 811, subsection (c). The eight factors are:

1. The drug’s actual or relative potential 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

The NPRM discusses in detail the assessment conducted by the HHS towards each of these factors, ultimately concluding that marijuana has less potential for abuse than the drugs or other substances in Schedules I (such as heroin and peyote) or II (such as fentanyl and hydrocodone), that marijuana has accepted medical use in treatment, and that the abuse of marijuana may lead to moderate or low physical dependence or high psychological dependence. The NPRM seeks cannabis stakeholder comment and feedback in connection with the DOJ’s evaluation of the eight aforementioned factors.

Notably, the proposal to reschedule marijuana applies to substances meeting the statutory definition of “marijuana,” limited to the Cannabis sativa L. plant (other than the mature stalks and seeds) and derivatives of the plant, including marijuana extracts and any part of the plant with a delta-9-tetrahydrocannabinol (THC) concentration of not more than 0.3% on a dry-weight basis (the definition of “hemp”). The proposal does not apply to synthetically derived THC, which is outside of the CSA’s definition of marijuana. Synthetically derived THC will remain in Schedule I. Furthermore, stakeholders should be aware that the manufacture, distribution, dispensing and possession of marijuana would remain subject to the applicable criminal prohibitions under the CSA.

Implications of Rescheduling Marijuana

If finalized, the proposed rescheduling of marijuana from Schedule I to Schedule III could have far-reaching implications for the cannabis, pharmaceutical and banking industries. The evolving regulatory landscape presents opportunities and challenges for businesses operating in the cannabis industry. As federal policies shift towards a more permissive approach, businesses must remain vigilant and proactive in navigating the changing regulatory environment while assessing potential new opportunities provided by the federal government’s new stance.

Rescheduling marijuana from Schedule I to Schedule III would subject marijuana to the same regulatory controls applicable to Schedule III substances. Marijuana would remain subject to the applicable provisions of the Federal Food, Drug, and Cosmetic Act (FDCA) under the jurisdiction of the Food and Drug Administration (FDA). In the NPRM, the DOJ notes that a drug containing a substance within the CSA’s definition of marijuana would need FDA approval to be lawfully “introduce[d] or deliver[ed] for introduction into interstate commerce,” unless an investigational new drug (IND) is in effect for that drug. The classification of marijuana as a Schedule I controlled substance has inhibited those seeking federal funding for research that could establish cannabis as a generally recognized as safe ingredient (GRAS) by the FDA. As noted in the NPRM, the FDA would require approval of any drug products containing marijuana, ensuring they meet safety and efficacy standards before entering interstate commerce. The rescheduling of marijuana to Schedule III would allow for more extensive clinical research and pharmaceutical companies could submit INDs and new drug applications (NDAs) for marijuana-based products to demonstrate their safety, efficacy and manufacturing quality. In addition, this change could make it easier to access certain funding and grants previously unavailable to parties interested in research and development opportunities related to marijuana.

In addition to the processes that would apply to marijuana-based products as a part of the drug development and approval process, the regulatory processes that apply once a drug is approved will also apply for marijuana-based products. For example, the DEA requires registration to permit businesses and/or individuals to manufacture, import, export, distribute and dispense controlled substances. Businesses newly engaging in the cannabis industry should be mindful that the DEA registration requirements may apply once the proposed language is finalized.

Financial Implications for Businesses

Rescheduling cannabis could alleviate some financial burdens for cannabis businesses. Currently, those in the cannabis business face prohibitive tax burdens due to Section 280E of the Internal Revenue Code, which does not allow certain business deductions for businesses trafficking a Schedule I or II drug. As a result, these businesses often encounter higher income tax rates and often encounter higher costs and less favorable terms for loans and insurance due to the risks associated with Schedule I substances. Removing cannabis from Schedule I could significantly reduce these financial and operational challenges for those in the cannabis industry.

Rescheduling marijuana from Schedule I to Schedule III has the potential to impact the banking industry, primarily by reducing the regulatory and legal risks associated with providing financial services to marijuana-related businesses (MRBs). As a Schedule I drug, marijuana is classified as a substance with no accepted medical use and a high potential for abuse, making it illegal under federal law. This creates significant legal risks for banks that provide services to MRBs, as banks could be accused of money laundering or aiding and abetting criminal activity. By rescheduling marijuana to Schedule III, which would bring the substance into alignment with other highly regulated drugs, the risks of such accusations may be minimized. The proposed changes may result in helping cannabis stakeholders gain access to loans and move away from a cash-only business. Furthermore, rescheduling marijuana to Schedule III would likely prompt federal regulatory agencies, such as the Financial Crimes Enforcement Network (FinCEN), to issue updated guidance on banking to MRBs. Updated guidance from FinCEN would provide banks with a clearer framework for legal compliance and risk management.

Importantly, banks may continue to find it risky to open their doors to MRBs following this news, given the statutory and regulatory ambiguity surrounding the impacts of reclassification. Notably, other legislation, such as the Secure and Fair Enforcement Regulation Banking Act (SAFER Banking Act), provide clearer protections in statute, if codified, and banks may consider waiting to make operational changes until after further protections have been enacted.

Words of Caution

Cannabis stakeholders should note that the rescheduling of marijuana does not decriminalize marijuana or legalize recreational use, and the same criminal prohibitions against the manufacture, distribution, dispensing and possession of marijuana would apply, similar to those restrictions applicable to similarly situated Schedule III controlled substances such as ketamine and anabolic steroids.

Additionally, the federal rescheduling of marijuana does not directly impact the status of cannabis-related state laws, including adult use, medical use or CBD/low THC state cannabis regimes. Stakeholders should consult with legal counsel to assess what impact, if any, the rescheduling of marijuana would have on a state’s specific cannabis laws.

NEXT STEPS

The NPRM comment period ends on July 22, 2024. Stakeholders interested in commenting on the proposed rules must submit comments electronically or by mail on or before July 22, 2022.

As federal cannabis regulations undergo significant changes, stakeholders must stay informed and involved in the rulemaking process, and businesses must continue to adapt to the evolving landscape to remain competitive and compliant. For more information and guidance on navigating cannabis regulation, please contact one of the authors or any other member of McDermott’s Cannabis Regulatory Practice Group and the Food, Drug & Medical Device Regulatory Practice Group. McDermott will continue to monitor cannabis regulation as it develops.