Given our position in the cannabis industry as the leading compliance company, we’re often asked for our thoughts on the recommendation from the Department of Health and Human Services (HHS) to the Drug Enforcement Agency (DEA) that marijuana be reclassified from Schedule I to Schedule III. Honestly, we shy away from questions like this because we want to be very self-aware of what we are and aren’t. Simplifya is a software company. We don’t provide consulting services or legal advice. We are not a law firm.
And yet, we have several lawyers on staff who are very familiar with the regulatory landscape of the cannabis industry. This recommendation from the HHS is the kind of news you’d find them nerd-ing out about in the office break room. That was what sparked the idea for this post – what if we just moderated a virtual break room discussion about rescheduling? It’d be a way to share their expertise without it being construed as legal advice.
In the room, we have Joe DeVore, Dylan Sheji, and Snowden Stieber. Between the three of them, there are three law degrees, nearly 12 years of experience writing regulatory content for the cannabis industry, and no shortage of opinions on rescheduling!
Let’s start with what it means to reschedule marijuana?
Joe: The way the scheduling mechanism works is by weighing the potential for abuse and the medicinal value of a substance. Schedule 1, the highest schedule, are drugs that have no recognized medicinal value and a high potential for abuse. Schedule 5, on the other hand, are drugs that have a low potential for abuse and a lot of recognized medicinal value.
Snowden: Rescheduling a controlled substance requires a decision to be made by a government agency (in this case, the HHS and Department of Justice). Under US law, government agency decisions can be challenged and submitted to judicial review when decisions are thought to be arbitrary. Given cannabis’ current scheduling as a drug with no medical use and high abuse potential, any decision away from that status must be reasonably connected to facts. The decision to move to Schedule III (medical uses, moderate-to-low potential for abuse) is the one that the agency feels would be most reasonable, and least likely to be open to a charge of an arbitrary decision. If the agency chose to move cannabis to Schedule IV or V (with a low potential for abuse), it would likely be asked to explain why it chose “low” over “moderate-to-low” potential and a failure to adequately defend the decision could imperil the entire rescheduling effort.
Dylan: Schedule III is a very safe choice that will provide benefits while also keeping cannabis relatively controlled.
What was your first reaction to the rescheduling recommendation?
Joe: I see this ultimately resulting in the end of the state-regulated system. The FDA will have more authority to regulate cannabis, and if the FDA regulates it in the same way as it does other drugs in Schedule III, there will be prohibitively expensive regulations that preclude all but large pharmaceutical companies from participating. This will eliminate the “mom and pop” businesses entirely from the industry.
However, these consequences likely won’t be felt for several years. The federal government moves very slowly and methodically. First, the FDA would need to receive appropriations to make and enforce rules for cannabis businesses. Then, they would need to draft those rules, going through the necessary legal channels to receive and implement feedback. Finally, they would have to actually enforce these rules, which would involve hiring more agents or other mechanisms to force states to enforce these rules.
An example of one of these mechanisms comes from when the age to purchase and consume alcohol was increased from 18 to 21. Louisiana wanted to keep it at 18. The federal government couldn’t explicitly force Louisiana to change its drinking age, however, they did threaten to pull federal funding for its highways, as they could draw a line to connect drinking ages, DUIs, and highway safety. They could potentially take a similar tactic to enforce cannabis laws.
Good points Joe, what about you Dylan?
Dylan: My initial thought was just, “this will be interesting.” For the longest time, the cry of legalization was “deschedule it” and “regulate it like alcohol.” Alcohol was always the prime comparison to how cannabis should be treated. It’s interesting how many descheduling proponents have now come out in full support of rescheduling. While any movement toward recognition of the benefits of cannabis at a federal level is a huge step forward, how this interacts with current cannabis business structures is uncertain.
The fear is that if successfully rescheduled and treated as any other Schedule III substance, the federal government could force states to end their legal markets and comply with federal scheduling. As a Schedule III substance, prescriptions would be required to use any form of cannabis; currently, no Schedule III substance can be used legally as a recreational substance. Cannabis production and distribution would be strictly controlled by pharmaceutical companies.
In a best-case scenario, cannabis would move to Schedule III and state businesses would be allowed to continue as normal, since these businesses already exist as a successful exercise in states’ rights and federalism. The businesses that will suffer the most from rescheduling would be medical businesses. No longer will a recommendation from a doctor suffice, but a full-on prescription for cannabis will be required with all the negatives that come with it.
In a worst-case scenario, the recreational markets will no longer exist and cannabis will only exist as a medicine, and a likely return to rampant black market cannabis and dealers will occur.
Overall, I’m pessimistic. Yes, there are benefits, and recognition of the value of cannabis is a huge step forward. Doctors and scientists can conduct full research on the effect of the plant and we can finally have good research no longer mired in stereotypes and interference that can reveal some great truths concerning the plant. But I think rescheduling would also mean a lot of the progress we’ve made in making cannabis accessible to patients and consumers would be lost.
Which means a lot of revenue and taxes would be lost too. But there’s a bigger picture perspective as well, isn’t there Snowden?
Snowden: Absolutely. Rescheduling cannabis represents a significant moment in US drug policy history, but that isn’t the same as a significant impact on the current cannabis industry. Descheduling would have been the ideal choice for cannabis, there’s no question, but even descheduling wouldn’t have been the golden ticket that the cannabis industry hopes for. While descheduling would remove many of the current impediments to full cannabis operations, it wouldn’t remove the regulatory burdens found at the state and local level, nor the challenges of unlicensed markets.
Another thought: the history of licensed cannabis in the US is a story of the limits of federal enforcement mechanisms – at no point have any of the state-legal cannabis markets ever been federally permitted, but they have continued to grow and persist because of the constraints on federal budgets and on the inability of federal agencies to act. Rescheduling cannabis to Schedule III will represent a new terrain of potential regulation for the plant, but by no means does rescheduling represent a definite change in the limits on federal regulation. The FDA has an extensive budget allocated for regulating pharmaceutical and food products, but the additional burden of regulating state-legal cannabis markets represents a logistical and political nightmare that no federal agency will voluntarily claim. If we are going to see greater federal regulation and recognition of cannabis, it will come from legislative bills, not from a federal policy change in the executive branch.
On the negative side, cannabis rescheduling doesn’t necessarily mean the end of criminalization of cannabis. We are already seeing the re-felonization of cannabis in legacy states with licensed markets. For example, California has recently made it a felony to impact state water systems with unlicensed cannabis cultivation. This measure is designed to bring the force of jail time and old-school criminal law enforcement back to cannabis. Rescheduling at the federal level will remove several of the ways that people are jailed for cannabis, but it will not stop states from implementing new ways to use the threat of a felony to deter cannabis activity.
For context, what else is in Schedule III?
Snowden: codeine, ketamine, anabolic steroids, testosterone.
Dylan: Ketamine is probably the closest analog to marijuana, but it’s still not that close. In 2019 the FDA approved a ketamine-based antidepressant and it is permitted by the FDA for supervised clinical use. Ketamine-based therapy is increasingly popular because clinics are producing great results for those suffering from depression. You cannot purchase ketamine recreationally, but you can be prescribed a nasal spray for it. This is quite different from how cannabis currently operates.
To the heart of this question, no there aren’t any Schedule III substances where the fed and states say something different. However, because of cannabis legalization, we are seeing more and more medical benefits emerge from Schedule I drugs. You know, the “no medical benefits at all” drugs. Colorado voted to decriminalize psychedelic mushrooms and allow therapy centers for mushrooms. These centers likely won’t open until 2025, but that is a huge step forward and other states may follow. Again, positive societal and legal acceptance of misaligned substances is a positive, and rescheduling would be a good step forward in a vacuum. But with how state industries are set up now, there really isn’t any indication of how they will operate if rescheduling occurs.
What about state programs and their ability to oversee and enforce?
Joe: The state regulators will not be impacted until the FDA creates and releases regulations and attempts to enforce those regulations, which as discussed earlier will take several years to see any movement.
Snowden: As it currently stands, existing licensed cannabis markets are overseeing and regulating a Schedule I substance. They’ve created these markets by preventing state law enforcement entities from enforcing federal cannabis laws, authorizing non-law enforcement agencies to regulate licensing and production of cannabis, and authorizing business activity to occur. None of these actions will be directly impacted by a rescheduling to Schedule III, and cannabis businesses will not have a different set of regulations to comply with because of rescheduling.
Dylan: Cannabis businesses already operate “illegally” under federal law, and will still be illegal if rescheduled. Until regulations are promulgated federally or federal guidance changes they will likely continue as they are now.
Will we see interstate trade with rescheduling?
Snowden: In a technical sense, rescheduling will have little immediate impact on the ability to conduct interstate trade – moving unapproved Schedule III substances across state lines is not “more legal” than moving unapproved Schedule I substances. But rescheduling will likely have an impact on the decisions made by state-level actors. Several states have passed laws like California’s, which enable the Governor to enter into interstate trade agreements for cannabis if they determine that there is little legal risk of federal law enforcement against the interstate cannabis trade. It could be argued that moving cannabis to Schedule III is a strong indicator to state actors that legal action is unlikely, which would in turn encourage interstate activity.
Joe: I agree with Snowden here. I doubt it will happen immediately, but I could see more states starting to push for interstate trade. In particular, I see it being more likely on the medical side first because you have the sympathetic argument of making sure that patients can adequately access their medicine. Additionally, you can expect to see this being pushed for hardest by states with more supply than demand because of their licensing system, such as Oregon.
Dylan: As it stands now I’m pretty doubtful this will affect interstate commerce. To use the Schedule III analog of ketamine, a telemedicine company called Peak was shut down in late 2022. During the COVID-19 pandemic, the DEA relaxed regulations regarding the transport of controlled substances, namely Schedule III and IV drugs. Peak took advantage of this and began prescribing ketamine and transporting it across state lines. The company went viral on TikTok, the government noticed, and the company was shut down. There will certainly need to be some sort of either state or federal intervention to allow interstate commerce, and Schedule III may be an impetus to push for it, but there is no guarantee that it will be allowed at all.
What do you think rescheduling will do to the industry and its growth potential?
Joe: Initially, I think rescheduling will slow the consolidation of the industry due to the tax relief that will be available. It will give the smaller operators a bit more runway to continue operating. However, this will only be a temporary solution for smaller operators, and once they run out of this extended runway I expect consolidation to accelerate. The larger pharmaceutical companies will start to buy into the industry more and more.
Dylan: One would imagine that the move to Schedule III would increase the involvement of “Big Pharma” in the cannabis industry. We are already seeing greater consolidation among cannabis businesses and the rise of many multi-state operators. Theoretically, we could be seeing pharmaceutical businesses trying their hand now that it is more federally accepted. Schedule III removes 280E, which is a major relief, but it won’t matter if it serves as a tipping point for gigantic pharmaceutical companies to enter the market. The smaller licensed operators will get run over.
Okay, now that you mentioned 280E, let’s talk tax. What are the tax implications?
Joe: This will provide immense help to all operators in the short term, however, they should be careful to not prioritize these short-term gains over the long-term health of the industry. The average price per pound for cannabis flower will likely continue to drop. If interstate commerce comes as a result of rescheduling, the price will drop even further as states with excess supply export to states with excess demand.
Snowden: Rescheduling’s biggest impact will likely be felt in the tax arena. Under the provisions of 280E, businesses that handle Schedule I or II substances are not permitted access to a bevy of standard deductions that are available to lawful businesses. By moving to Schedule III, cannabis businesses would be able to access a large amount of cash that was previously set aside for extreme tax rates. This will be a big relief to current licensed operators and expands the timeline for keeping businesses afloat.
Even though rescheduling will fix a huge burden on the market, it won’t solve some of the problems that are more inherent to early licensed cannabis markets. Early markets often had price points of $1500-1600/lb for cannabis flower, which guided investing and business projections. The ensuing decade has shown a steady march towards a price that is little more than half of those early numbers, between $700-900/lb. While the burdens of 280E were immense, the tax relief won’t be able to reconcile the flawed models that some businesses were formed under.
What are the implications of rescheduling on banking?
Joe: It’s possible that cannabis would not be deemed an unlawful activity for the purpose of banking, provided you follow the FDA rules. If these rules are anything like the ones for other Schedule III drugs, they will be onerous. Large pharmaceutical companies will have a leg up in this environment, as they are already used to operating within that framework.
Dylan: Cannabis businesses as they exist currently under a Schedule III regime would still be immensely risky to banks. However, if pharma companies get involved banks would have no problem backing them. Again, smaller businesses would diminish over time, leaving only those with the capital and backing to play ball.
Does rescheduling do anything for the public perception of cannabis?
Joe: The stigma of cannabis would decrease. It will be seen more as medicine and a positive in the world, something that would put the “reefer madness” campaigns of the 30s and the DARE programs of the 90s even further in the rearview mirror.
But there’s still plenty to worry about. Large pharmaceutical companies will introduce large-scale production and proportionately lower prices that will put the smaller players out of business. With less competition, we could see a regression in quality comparable to the state of beer in the pre-craft beer industry. And because Schedule III would treat it as medicine, the smoking of cannabis in all of its forms may give way completely to purely ingestible forms akin to Advil or Tylenol.
What implications could it have on international agreements?
Snowden: There is no question that rescheduling cannabis will impact our standing with international drug treaties, and would be a possible reason why the DEA rejects the HHS recommendation. The question is, however, if international law and the international community have any interest or ability to enforce penalties against a rescheduling.
The primary treaty governing cannabis controls is the Single Convention on Narcotic Drugs (SCND), which was passed in 1961. Without getting into an in-depth history of international law and mid-20th century treaty formation, the SCND was an attempt to recreate an even older drug regulatory program that was focused primarily on opium but has always been viewed with suspicion by many actors in international politics as an immense invasion of national sovereignty. There have already been two other nation-states that have “violated” the SCND regarding cannabis – Uruguay and Canada – and neither of them has faced more than a statement of disapproval by the UN. Compared to all of the other ways that US policy has friction with international agreements, the chances are extremely small that the international community will move to act on the particular matter of cannabis rescheduling.
Additionally, and at the risk of speaking too brashly – international commerce is already happening in cannabis. For example, licensed businesses in Thailand are already complaining about California cannabis undercutting local production. We obviously don’t know who, specifically, is transporting cannabis from California to SE Asia, but the trade is definitely happening. Rescheduling will not bring about a change in international drug laws, but I also don’t see it having a material impact on unlicensed international cannabis commerce either.
Okay. Do you think rescheduling will actually happen? Why or why not?
Joe: I’d say it’s 70% likely to happen. This is the first time the HHS has recommended a rescheduling for cannabis and this will likely hold a lot of weight. However, you cannot completely rule out the possibility of the DEA maintaining its long-held stance on any sort of cannabis rescheduling or rescheduling. It has been petitioned for many times but has not yet been granted. The DEA could continue to insist that it knows best.
Dylan: I’ll say 75% likely.
Snowden: I think scheduling is highly likely to happen. If we want a number, I’m comfortable with something closer to 90-95% likelihood. Direction from the President will guide the DEA, and he said quite clearly that no one should be in jail for simply possessing marijuana. Given that and the recommendation from the HHS, I feel strongly that rescheduling will happen. I am less certain that the drug will be rescheduled to a particular class – II, III, or IV – but I’m most inclined to join the chorus calling for Schedule III.
How would it impact Simplifya and our offerings and/or usefulness?
Joe: The impact to Simplifya won’t be felt for several years. If the FDA decides to intervene, we’ll be well-positioned to help businesses comply with all regulations. Likely, our services will be even more important for operators due to the onerous nature of the regulations and the new procedures operators will have to incorporate.
Finally, when might rescheduling happen?
There’s been a lot of misplaced analysis and predictions about the speed of a rescheduling effort, but there are concrete reasons to believe that the process will move along more quickly than most other reschedulings. The HHS issued its recommendation to the DEA this fall, ahead of the anticipated timeline of the HHS Secretary. While we do not currently know the full details of the HHS’s recommendation to move cannabis to Schedule III, the DEA has historically respected FDA recommendations when it comes to rescheduling, and even nonpartisan reporters at the Congressional Research Service have published confident statements that rescheduling is happening.
The primary uncertainty at this moment is the urgency of the DEA officials: are Biden’s comments reflective of an administrative focus on rescheduling, or is the agency going to be compelled to respond by the legislature? Even at this moment, there is a new bill introduced in the House, H.R. 6028, which would legislatively reschedule cannabis, free from executive input.
I expect the next step in cannabis rescheduling to be announced before the end of this year, for reasons of both politics and administrative process. Of course, the federal government can take unpredictable or stubborn turns at any time, but the evidence points toward positive action soon.