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The Cannabis Rescheduling Recommendation: Implications and the Road Ahead

The Cannabis Rescheduling Recommendation: Implications and the Road Ahead

The Cannabis Rescheduling Recommendation: Implications and the Road Ahead

September 1, 2023: Following the historic recommendation by the U.S. Department of Health and Human Services (HHS) on August 30, 2023, urging the rescheduling of cannabis from a Schedule I to a Schedule III Controlled Substance under the federal Controlled Substances Act, attorneys from Foley Hoag's nationwide Cannabis practice present the following analysis:

**Rescheduling FAQ**

1. **What occurred?**

   The U.S. Department of Health and Human Services (HHS) issued a recommendation to the U.S. Drug Enforcement Administration (DEA) proposing the reclassification of cannabis from a Schedule I to a Schedule III Controlled Substance. This shift involves defining Schedule I as substances lacking accepted medical use with a high potential for abuse, while Schedule III pertains to substances with moderate to low dependence potential. Both Schedules I and III strictly regulate possession, distribution, and manufacture, requiring prescriptions or DEA registration. These classifications are part of the Controlled Substances Act, which encompasses five schedules of controlled substances.

2. **Why did HHS make this recommendation?**

   Following President Biden's directive, HHS, in conjunction with the Attorney General and DEA, initiated an administrative process to review the federal scheduling of marijuana. HHS is authorized to make scheduling recommendations based on scientific and medical assessments, which are conducted by the Food and Drug Administration (FDA).

3. **What's the next step?**

   The decision to reschedule cannabis to Schedule III rests with the Attorney General and the DEA. DEA must propose a rule for this reclassification, and this rulemaking process involves considering various factors, such as cannabis's potential for abuse, scientific evidence, public health risks, and more.

4. **What role does the HHS recommendation play?**

   HHS recommendations are binding in matters related to scientific and medical aspects under the Controlled Substances Act.

5. **How would DEA implement this rescheduling if approved?**

   If DEA agrees to reclassify cannabis as a Schedule III Controlled Substance, it must follow formal rulemaking procedures, including public hearings and judicial review.

6. **What are the challenges ahead for a rescheduling order?**

   Challenges include international treaties, like the Single Convention on Narcotic Drugs, which the U.S. is a signatory to. Additionally, prior decisions by DEA and HHS in 2016 considered cannabis a Schedule I drug, raising questions about the basis for this change. The outcome of any judicial review remains uncertain.

7. **Will courts uphold a rescheduling order if DEA approves it?**

   While agencies typically receive deference from courts, especially in specialized areas like this, predicting court outcomes remains challenging.

8. **Will politics influence DEA's decision?**

   The Biden administration asserts that this decision will adhere strictly to scientific considerations, although the timing of the re-examination coincides with political events.

9. **Immediate impact of rescheduling cannabis to Schedule III**

   This change would eliminate the tax-related burden of Section 280E, allowing businesses to claim deductions. Federal penalties for cannabis crimes would also decrease.

10. **What won't change?**

    - Federal cannabis legalization will not occur.

    - States without authorized cannabis businesses will not see legalization.

    - U.S. cannabis companies won't immediately list on major exchanges.

    - FDA's regulatory oversight over state-legal cannabis won't immediately expand.

    - Interstate cannabis commerce remains illegal.

    - The complex legal landscape of federal illegality versus state legality persists.

11. **What could change?**

   In the long term, rescheduling could impact FDA regulations, investment, stock exchange listings, federal legislative momentum for legalization, and challenges to state-specific cannabis regulations.

**FDA Regulations:** Over time, the FDA could provide guidelines or exercise regulatory authority over cannabis. However, this process is expected to be gradual, subject to legislative intervention, and is unlikely to immediately preempt state regulations. The FDA's approach may involve labeling restrictions, purity standards, and good manufacturing practices. Still, the diverse range of cannabis products and the need for specific formulations and indications may complicate the FDA's regulatory path.

**Investment:** Rescheduling cannabis to Schedule III might rejuvenate capital markets as investors perceive reduced federal legal risks associated with Schedule III compared to Schedule I.

**Stock Exchange Listings:** Rescheduling could prompt Nasdaq and NYSE to reconsider their stance on listing U.S. cannabis companies involved in plant-touching operations.

**New Federal Guidance:** There may be updates to the "Cole Memorandum" or other guidance issued by the Attorney General, clarifying the legality of state-level cannabis industries, banking, and capital markets.

**Federal Legislative Momentum:** The momentum for federal cannabis legalization, as seen in bills like the Safe Banking Act, the MORE Act, or the Cannabis Administration and Opportunity Act, could receive a boost from rescheduling.

**Interstate Commerce:** Rescheduling could challenge state laws that mandate in-state production and sales of cannabis, potentially leading to legal disputes under the Dormant Commerce Clause. While the impact of this change would unfold over time, it could eventually impact state-specific regulations, testing, labeling, and potency standards.

In summary, while the recommendation to reschedule cannabis to Schedule III represents a significant development, its full implications and consequences are complex and will depend on various factors, including DEA action, legal challenges, and potential legislative changes. The evolving landscape of cannabis regulation in the United States continues to raise important questions and considerations for stakeholders across the industry.

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