For the past 50 years, federal law has prohibited the use, cultivation, and distribution of cannabis. These prohibitions have had long-term and far-reaching effects: taxpayers spend some $3,600,000,000 annually on enforcement of cannabis prohibition and cannabis accounts for more than a half million arrests by the FBI each year. And communities of color are far overrepresented in arrests and convictions for cannabis possession, despite equal usage among demographics.
While federal prohibition has continued, states and territories have embarked on their own legalization efforts. Today, medical cannabis is legal in 36 states, four permanently inhabited territories, and the District of Columbia. Recreational cannabis is legal in 18 states and the District of Columbia. And another 13 states have decriminalized cannabis. This has led to a tense balancing act in which each legal state has cultivated its own internal regulatory regime and cannabis industry while attempting to avoid enforcement actions initiated by federal law enforcement officials.
The Cannabis Administration and Opportunity Act Could Radically Change the Legal Landscape
For a number of years various efforts have been made in Congress to repeal cannabis prohibitions, but without any real success to date. The latest attempt—and perhaps the most high profile—is the Cannabis Administration and Opportunity Act (CAOA), sponsored by Sens. Booker (D-NJ); Schumer (D-NY); and Wyden (D-OR). The bill seeks to rectify the adverse effects of the War on Drugs and reinvest in communities of color by decriminalizing and descheduling cannabis. The bill also includes other significant provisions, including a reshuffle of agency responsibility for cannabis,
Among these proposed changes, industry observers and cannabis law experts have focused on what is likely to be a highly contentious, practical impact of any federal decriminalization of cannabis: interstate commerce. The cannabis industry is worth some $61 billion nationwide, with customers spanning generational divides. States with legal cannabis have seen billions of dollars in additional tax revenue; and the cannabis industry is responsible for some 321,000 full-time jobs nationwide. If a federal legalization instantly enables interstate commerce of cannabis, as the CAOA would, it could upend mature and established state economies and the small businesses thriving within them.
For example, California and Oregon have experienced significant cannabis oversupply: cultivators have grown more cannabis than they can sell. Currently, in-state cannabis cannot cross state lines, but that would change the moment interstate commerce becomes legal. Cheaper cannabis would quickly spill into smaller markets, which would jeopardize the viability of in-state businesses unable to compete with economies of scale from elsewhere. In response, smaller or less competitive states would face a difficult choice between allowing in-state businesses to suffer and enacting laws intended to shield them from competition. For example, California may solidify its position as the key “sungrown” cannabis producer state, consistent with its market share of wine and strawberry production, which total 90% and 83% of all domestic production, respectively.
Potential Challenges Under the Dormant Commerce Clause
Any attempt to protect in-state cannabis companies from interstate competition would run into stiff opposition under the Dormant Commerce Clause. The Dormant Commerce Clause (DCC) is an implied doctrine that circumscribes states’ power to regulate interstate commerce. In practice, it is infrequently implicated. Under the DCC, states are prohibited from unduly burdening or discriminating against out-of-state competition. In other words, individual states may not enact laws intended to inhibit commercial activity between states.
Under current law, implicated state laws only survive constitutional scrutiny if the state can show that there is no other reasonable means of advancing a legitimate, non-economic state interest. Essentially, this means that a state must prove that its laws are necessary to advance an important state concern. State laws will also be struck down if the burden on interstate commerce outweighs the state’s interest.
In practice, the DCC rarely surfaces in constitutional litigation. However, if the CAOA or a similar bill were to pass, it is likely that new state laws would follow to protect in-state cannabis economies; and legal challenges under the DCC would doubtless follow.
Up until this point, states have operated under the assumption that the DCC does not apply to the cannabis market because cannabis remains federally illegal and is therefore banned from interstate commerce. As such, states have imposed a variety of obstacles, restraints, and limits to the interstate commerce of cannabis products. For example, states that have legalized marijuana prohibit the sale of cannabis across state lines and there is a blanket ban on import and export by licensed marijuana businesses. Also notable are state laws that permit cannabis producers to sell their product only to in-state licensed retailers. Some states also prohibit non-residents from operating or investing in cannabis businesses. Many of these laws would not survive in the face of legal interstate commerce.
The Supreme Court has held that, under the DCC, discriminatory state laws have a “virtually per se rule of invalidity.” City of Phila. v. New Jersey, 437 U.S. 617, 624 (1978). In the past, by way of example, the Supreme Court has invalidated state laws precluding out-of-state milk suppliers from building plants in the state,1 as well as a law prohibiting the sale of milk that was processed outside of the state.2 It is not difficult to draw comparisons between these cases and numerous existing state laws.
If Congress opens cannabis to interstate commerce and state laws are invalidated under the DCC, there would be serious consequences for local farmers and retailers currently protected under state laws would be forced to compete in a national market and would not always survive. This is doubly true when large companies with more available capital enter the cannabis market once federal prohibitions are lifted. Additionally, those parts of current regulatory schemes that do not comport with the DCC would likely be struck down or withdrawn, thereby requiring state-based markets to redevelop systems and processes that have served those states well to date.
A second and related implication of the DCC is that the invalidation of state laws would leave major gaps in the cannabis regulatory framework. For example, the CAOA expressly allows states to regulate cannabis transported into the state “in the same manner as though the cannabis had been produced in that State.” But what does this look like when each state has its own way of doing things, and existing state frameworks do not even contemplate importation of cannabis from other states?
An interesting quirk resulting from this dual legal status for cannabis, is that there is a high degree of variability in marijuana markets: there are no universal standards; no single regulatory framework or marketplace structure. State agencies are tasked with developing licensing schemes and regulations that govern cultivators, manufacturers, distributors, and dispensaries. And each state has taken a different approach. For example, in Oklahoma, a cannabis license is issued in 45 days; in other states the process may span several years and cost millions of dollars. Policy and safety concerns also vary among states, which inform the regulations that govern growing, labeling, testing, marketing, and selling cannabis products.
Sponsors of the CAOA have stated that they want to empower states to implement their own laws. Indeed, federal lawmakers have not proposed uniform guidelines to govern the cannabis marketplace if Congress decides to decriminalize cannabis. However, further analysis is needed at both the state and federal levels in order to avoid a circumstance in which companies and regulatory regimes in states with legal cannabis are suddenly upended in the face of changing federal law.
This document is intended to provide you with general information regarding current laws and legislation related to regulating cannabis. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions. The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and insights are not automatically updated, continued accuracy cannot be guaranteed.
1 H.P. Hood & Sons v. Du Mond, 336 U.S. 525 (1949).
2 Dean Milk Co. v. City of Madison, 340 U.S. 349 (1951).