Adam Detsky and Carlos Enrique Provencio of  Wilson Elser write……

In November 2011, the governors of Washington and Rhode Island[1] filed a petition with the U.S. Drug Enforcement Agency (DEA) asking that marijuana be reclassified as a Schedule II drug. Nearly five years later, when the DEA indicated earlier this year[2] that it would announce a decision on the petition, numerous industries on the “outside looking in” were eagerly watching from the sidelines. Leaders in the worlds of banking, insurance, pharmaceuticals – and just about the entire investing universe – were hoping that marijuana would lose the stigma of a Schedule I drug. In the eyes of most, a rescheduling would have been the green light to enter a rare growth industry in a market teetering on the verge of exploding.

These investors and insurers held dreams of unbridled access to enormous growth potential and revenue streams. When news came in early August 2016 that the DEA would not reschedule, those dreams were dashed. But was the decision bad news? The answer is, “Not really.”

The Upside of Schedule I Status

In reality, the DEA’s decision was a win in many ways for existing cannabis businesses in Colorado. The decision reestablished the status quo, eliminated significant uncertainty, and ultimately will prevent the industry from being usurped by big business and the outside investor world.

The DEA decision couldn’t have come at a better time, allowing the state to avoid for the time being the issues coming from outside Colorado while facing mounting issues within the state as a result of the industry’s rapid growth. First, Denver recently passed strict rules on the issuing of new licenses to all types of marijuana operations.[3] Now Pueblo, a city many businesses chose in lieu of Denver, currently faces a kill bill – an initiative on the November ballot to force the closure of all recreational cannabis retail stores within the municipality.[4] Simultaneously, Amendment 139 to the Colorado Constitution is under consideration. This is an amendment that would limit the potency of cannabis to less than 16 percent – an amendment that could cripple or destroy the extracts market.[5]

For now, Colorado businesses can focus their fight for survival on the threats from within. Had cannabis been rescheduled, Colorado would have had to wrestle with the tight regulations of the U.S. Food and Drug Administration (FDA) and the issues of preemption that surround it. Generally, states are free to make rules that are more restrictive than federal law, but not less restrictive. With a rescheduling, the federal government would officially enter the business of regulating cannabis manufacture and distribution. This would make a preemption claim more viable – unless the states affected adapted to the requirements for Schedule II drugs.[6] Schedule II drugs cannot be refilled; a new prescription must be issued in ink and physically presented to the pharmacist. Without rescheduling, states will not have to face the resulting questions about whether to enforce the far more restrictive federal rules, and the medical marijuana (MMJ) industry will not face a crippling decline in clientele due to the onerous restrictions. With no rescheduling, these issues are moot for the foreseeable future.

Effects on Businesses

A rescheduling had the potential to dramatically increase costs for smaller players, potentially pushing them out of business. Many cultivators and sellers rely on having quality, unique strains to differentiate themselves in the market. If marijuana were made Schedule II, then the industry might be facing the possibility of having their strains, extractions and infused products subject to FDA review. An FDA review of a product can take years to complete and no one knows to what extent testing would be required. Would every strain need FDA approval? Every infused product? How would an ongoing FDA review affect a business’s ability to sell its product or to market it? FDA reviews have been known to cost millions of dollars. Costs would skyrocket to the point that regulatory costs would force out many, if not all, small businesses entirely. Big businesses would be in a position to crush the small businesses.

Keeping cannabis as Schedule I keeps Big Pharma companies out of the arena. Their endless resources, coupled with their distribution networks, have the potential not only to force out the small businesses but also drive down the value of existing licenses. Likewise, another upside of the DEA decision is that outside investors, bankers and insurers have gotten some answers. Fears of investing in these small businesses wane when the investment does not have a legal guillotine looming over it controlled by big business.

Analysis

The decision wasn’t so much a closing of a door as is was an affirmation of the status quo. The DEA made it clear in the public relations blitz accompanying the announcement that marijuana is simply not on its priority list. The DEA’s limited resources are focused on a surging opioid epidemic and increases in heroin, fentanyl, meth and cocaine. For now, the DEA ruling changes nothing other than to confirm that a well-regulated cannabis industry such as the one in Colorado will not be their target – so long as the industry is policed and is policing itself.

Additional good news comes in the form of opening the door to legitimate research regarding marijuana. While there is some research out there, a vast majority of these so-called studies falls short of the extensive testing and monitoring requirements that the FDA and the DEA have traditionally required. Up until this point, only the University of Mississippi was sanctioned to grow marijuana, which seriously restricted the supply of the plant available to scientists and impacted study results as supply was reduced. However, at least in theory, more universities soon will be able to apply to grow marijuana for research purposes. The DEA and FDA have publicly expressed interest in developing “therapies from marijuana and its components.”

In the end, marijuana remains illegal under federal law, which may be viewed as a negative by many. However, the reality is that the decision by the DEA is mostly good news for Colorado’s cannabis industry.

[1] http://articles.latimes.com/2011/nov/30/news/la-pn-governors-marijuana-20111130

[2] http://www.usatoday.com/story/news/2016/05/21/dea-could-reschedule-marijuana-allowing-doctors-conduct-more-research/84670716/

[3] https://www.newcannabisventures.com/denver-moves-to-limit-cannabis-licenses/

[4] http://www.westword.com/news/marijuana-businesses-should-be-banned-in-pueblo-county-new-petition-says-7769119

[5] http://www.sos.state.co.us/pubs/elections/Initiatives/titleBoard/filings/2015-2016/139Final.pdf

[6] https://www.dea.gov/druginfo/ds.shtml

Adam Detsky
Attorney at Law
Wilson Elser Moskowitz Edelman & Dicker LLP
1225 17th Street, Suite 2750
Denver, CO 80202
303.572.5348 (Direct)
303.572.5300 (Main)
303.572.5301 (Fax)
adam.detsky@wilsonelser.com