Authored By Edward “Teddy” Eynon,   Fox Rothschild LLP

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The Legalized Cannabis Industry and the Current Political Environment – Will It Grow?

In response to the Woodstock culture, President Richard Nixon signed into law the Controlled Substances Act. Under this legislation, the Drug Enforcement Agency and the Food and Drug Administration were born and marijuana was deemed not only a narcotic but to have no medical benefits, thus making it a Schedule I controlled drug under the Drug Enforcement Agency’s drug schedules.

Almost half a century later, the debate about marijuana continues. The movement to legalize marijuana has been spearheaded not by politicians, but by the American people. Over the last decade in particular there has been a growing number of ballot initiatives to legalize medical and/or recreation marijuana across the country. Today only six states have no legalized a form of medical marijuana and seven states and the District of Columbia have legalized recreational marijuana.

This past Election Day, voters in five more states considered medical and recreation legalization and another four considered legalization for medical marijuana only.  Of these nine measures, only one did not pass. Marijuana is now legal on the entire Pacific Coast, due to legalization ballot passing on Election Day in California.  Success of the measure in California opens up legal marijuana in the largest market in the country.  This is only the beginning though; cannabis will continue to grow in our country.

The strongest signs for growth come from the states. There, citizens have seized the initiative to legalize marijuana and the success of the ballot initiatives has demonstrated the will of the voters on this issue. In fact, Tuesday’s results show support for legalization growing at a quick and efficient pace despite mediocre support from the political establishment.

In fact, some states have resented legalization of marijuana by their neighbors. In March 2016, the states of Nebraska and Oklahoma filed suit against the state of Colorado in the U.S. Supreme Court, alleging that the legalization of marijuana in Colorado has stressed the law enforcement in Nebraska and Oklahoma, as well as undermined existing federal law. The Supreme Court declined to take up the complaint. However, two dissenters, Justices Thomas and Alito, said they believed the Court has an obligation to settle disputes, such as these, between states.

To date, Congress has mostly played ostrich on this issue. Yet, a handful of members of Congress have taken the lead on cannabis legalization and accessibility for businesses. Historically an issue which garnered support only from the far left, today it has support on both sides of the political spectrum.

The strongest support in Congress, from both sides of the aisle, is with regards to hemp. First introduced in 2005, the Industrial Hemp Farming Act would create jobs by opening the marijuana market for hemp crops, health food, oil, shirts, towels, and more. The 2015 version of this legislation has bipartisan support in both the House of Representatives and the Senate, including Senate Majority Leader Mitch McConnell (R-KY), Sen. Rand Paul (R-KY), Sen. Jeff Merkley (D-OR), Sen. Ron Wyden (D-OR), Rep. Thomas Massie (R-KY), Rep. Jared Polis (D-CO), and 84 other members of Congress. .

While there is a great deal of support for this legislation within Congress, it has yet to be considered by either chamber’s committee of jurisdiction. The inaction on this legislation is a telling sign of how Congress has avoided the issue and will likely continue to try to avoid answering the question of legalization.

Congress has neglected taking up the issue because it is not considered a priority as important as jobs, healthcare or fighting terrorism. Despite inaction, some members of Congress continue to advocate for marijuana expansion in a variety of forms. For example, legislation or amendments that would allow access to banking and federal research programs have been introduced as a result of pressure from states seeking to manage some of the complexities caused by legalizing at the state level what remains illegal under federal law.

Existing banking laws prevent banks from interacting with persons or businesses which deal in controlled substances. Moreover, banking institutions, employees, and customers are vulnerable to liability when dealing specifically with marijuana-related transactions. Current law goes so far as to make it a crime to withdraw money generated from marijuana sales to pay the employees that sell marijuana.

In response, Sen. Jeff Merkley (D-OR) introduced an amendment that would allow banks to provide services to cannabis businesses in states where it is legal without the banks, companies, or employees being penalized by federal regulators. The amendment passed the Senate Appropriations Committee with bipartisan support. This legislation has not been considered by the whole Senate.

If and when Sen. Merkley’s amendment is considered by the full Senate, both cannabis companies and banks could see an ease to their concerns of safety, criminal liability, and avoid closure. Most important, the Merkley amendment would provide a means for cannabis companies to move out of cash-only transactions and to a more traditional business model.

For cannabis companies to fully operate as traditional businesses, Congress must be willing to address existing tax law. Section 280E of the Internal Revenue Code does not allow marijuana companies to deduct businesses expenses such as labor, rent or utilities. Further, the section specifically restricts companies that deal in Schedule I and II drugs as defined by the Controlled Substances Act. Therefore, Congress must amend the law for both banks and cannabis companies to participate fully and lawfully.

Where Congress has taken a backseat on cannabis legalization, the Administration has stayed silent … for the most part. Throughout President Obama’s tenure, a number of memoranda have been sent to federal prosecutors from the Deputy Attorney General directing them on whether or not to proceed with prosecutions of marijuana cases in states where legalization exists.

In 2009, the Deputy Attorney General provided guidance suggesting that the Department of Justice would not prosecute marijuana cases so long as they complied with state law. However, in 2011 the Deputy Attorney General clarified that this was not the case. To further clarify the Department’s stance, the Deputy Attorney General wrote in 2013 that U.S. Attorneys should exercise prosecutorial discretion with regards to enforcement of the Controlled Substance Act. These directions to prosecutors limited and ambiguous and the President has not gone so far as to call for a change in the scheduling classification or recognition of the medical benefits of marijuana.

It is uncertain if the next Administration will continue the Obama Administration’s policy of noninterference. Reversing the Obama Administration’s policy would be easy for the next Attorney General, by simply withdrawing the Cole memorandum; however, such a move would defy the will of millions of voters and organizers who successfully worked for passage of these measures in the states and place a heavy burden on those states to wind down an aggressively growing industry.  President-Elect Trump’s stance on marijuana is not very clear. While President-Elect Trump has recognized the benefits of medical marijuana, he has not taken a stance on recreational marijuana. Therefore, it is unclear whether this is a measure he would be willing to take and what measures he will request incoming Attorney General Jeff Sessiosto take.

Ultimately the question is: Will cannabis grow in the current political environment? The short answer: yes. The reason: The American people. Politicians ultimately answer to the people and will yield to the growing public sentiment in favor of legalization. The most likely scenario is that medical marijuana baby steps its way to de facto legalization on the federal level through a combination of Presidential and Congressional actions that lead to banking and tax reforms that will allow cannabis companies to operate as traditional businesses. At that point, the transition to legal medical marijuana becomes a formality, with recreational marijuana following suit within the next decade, if not sooner.

The future of cannabis legalization is in the hands of the voters. Through the continued use of ballot initiatives at the state level to circumvent legislative opposition, the American people are shaping the political battlefield. It is only a matter of time before Congress and the President can no longer ignore the will of the people. The only questions that truly remain are which regulatory structure will marijuana be placed under once legalization takes place, and who will be allowed to participate.