California Inches Towards Interstate Cannabis Agreements

It’s no secret that state cannabis markets across the nation are suffering badly. Because of I.R.C. 280E, lack of access to financial institutions, massive operational expenses, plunging prices, and just gluts of production, it’s not pretty out there. However, there’s a newish light at the end of the tunnel, at least for California and other states that are game: interstate cannabis agreements. If interstate cannabis agreements open up between cannabis states, then maybe just maybe the cannabis industry can be pulled back from the brink of its hard landing in 2023.

Interstate cannabis agreements

Recall in September of last year, Governor Gavin Newsom signed Senate Bill 1326 into law (and it became effective on January 1 of this year), introducing the possibility of interstate cannabis agreements. California wasn’t the first state to do this. Oregon actually did it in 2019. Under SB 1326:

MAUCRSA specifies that its provisions shall not be construed to authorize or permit a licensee to transport or distribute, or cause to be transported or distributed, cannabis or cannabis products outside the state, unless authorized by federal law. This bill would make an exception to the above-described prohibition and would authorize the Governor to enter into an agreement with another state or states authorizing medicinal or adult-use commercial cannabis activity, or both, between entities licensed under the laws of the other state or states and entities operating with a state license pursuant to MAUCRSA, provided that the commercial cannabis activities are lawful and subject to licensure under the laws of the other state or states.

Pursuant to SB 1326, these interstate cannabis agreements would be between states. Not licensees. Licensees would still need to engage in contracts with each other for the actual import, export, and distribution of cannabis across state borders. Governor Newsom would be able to enter into these interstate cannabis agreements with governors from other states so long as:

  1. The commercial cannabis activities are lawful and subject to licensure under the laws of the contracting state; and
  2. With respect to the interstate transportation of cannabis or cannabis products, the agreement prohibits both of the following: (a) The transportation of cannabis and cannabis products by any means other than those authorized under both the laws of the contracting state and the regulations of the [California Department of Cannabis Control (“DCC”)]. (b) The transportation of cannabis and cannabis products through the jurisdiction of a state, district, commonwealth, territory, or possession of the United States that does not authorize that transportation.

Under SB 1326, the interstate cannabis agreement also requires that the contracting state agree that its cannabis licensees be bound by California’s requirements around public health and safety, track and trace, testing, inspection, packaging and labeling, and adulterated and misbranded cannabis. The contracting state must also impose “restrictions upon advertising, marketing, labeling, or sale within the contracting state that meet or exceed the restrictions” in California for the same. And all California taxes apply, too.

Further, out of state licensees (“foreign licensees”) cannot engage in commercial cannabis activity in California “without a state license, or engage in commercial cannabis activity within a local jurisdiction without a license, permit, or other authorization issued by the local jurisdiction.” So, foreign licensees will also be plagued by California’s local control issues if they seek to do business in one of our cities or counties that allows for commercial cannabis activity.

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The federal contingency for interstate cannabis agreements

Interstate cannabis commerce would be a dream for many licensees, and especially this kind of interstate commerce which would only: (a) be between cannabis states; and (b) involve existing state licensees (and not, let’s say, Costco or Amazon (yet)). But the passage of SB 1326 didn’t automatically create interstate cannabis commerce for California licensees. In fact, it’s creation is dependent upon:

  1. Federal law changing to allow for the interstate transfer of cannabis or cannabis products between authorized commercial cannabis businesses, i.e., legalization.
  2. Federal law enacted that specifically prohibits the expenditure of federal funds to prevent the interstate transfer of cannabis or cannabis products between authorized commercial cannabis businesses.
  3. The Department of Justice (“DOJ”) issuing an opinion or memorandum allowing or tolerating the interstate transfer of cannabis or cannabis products between authorized commercial cannabis businesses.
  4. The California Attorney General issuing a written opinion through the process . . . that implementation of interstate cannabis agreements will not result in “significant legal risk” to the State of California based on review of federal judicial decisions and administrative actions.

DCC and the California Attorney General

As reported by Politico last week, the DCC is going for option 4, which is really the only realistic choice right now. In an eight-page request and de facto legal brief, the DCC asks the State Attorney General’s office for an opinion in regards to whether interstate cannabis agreements will result in “significant legal risk” to the state, given that cannabis remains an illegal Schedule I controlled substance under the federal Controlled Substances Act (“CSA”).

To assist the State A/G with this request, the DCC articulates three legal arguments as to why California won’t ever feel the heat from the feds if Governor Newsom starts signing interstate cannabis agreements:

  1. The feds can’t dragoon the states into adopting or enforcing federal laws. Invoking the “anti-commandeering principle“, Congress can’t interfere with a state’s right to pass its own laws where Congress has not already legislated directly– even if interstate commerce is triggered. While the federal government can regulate private individuals, it cannot do the same to states. The DCC then requests that the state A/G forego a preemption analysis since it’s not relevant here and where no “positive conflict” with federal law exists anyway. After all, the feds can still prosecute individuals (and cannabis businesses) that choose to engage in interstate commerce.
  2. The CSA doesn’t criminalize states legalizing cannabis, and state officials are accordingly immune if they enforce and/or administer state cannabis laws and rules. The DCC also tells the State A/G not to sweat issues like aiding, abetting, and conspiracy for state officials and employees in this context because they’re not actually engaged in cannabis trafficking that violates the CSA. Lastly, the DCC cites to Gonzalez v. Raich to point out that the CSA doesn’t distinguish between interstate and intrastate commerce: both are equally as illegal under the CSA. In any case, California won’t suffer any greater liability than what already exists if interstate cannabis agreements are a go.
  3. As a throwaway argument, in regards to medical cannabis interstate commerce agreements, the DCC states that California is also safe from “significant risk” of federal enforcement because of the 2014 Rohrabacher-Farr-Blumenauer Amendment. The power of that Amendment to stop the feds from criminally prosecuting medical cannabis businesses (even though it doesn’t change the CSA) was tested in real time in California in the MAMM case in 2015, and then confirmed again in the McIntosh case in 2016 (at least for states in the Ninth Circuit).

States rights and DOJ enforcement

As I see it, the DCC is really hanging its hat on states’ rights and dual sovereignty in pushing the State A/G to opine that there’s no “significant legal risk” to California because of SB 1326. The anti-commandeering doctrine is not actually present in the Constitution, itself, though. The U.S. Supreme Court created the doctrine based on the 10th Amendment in two cases, New York v. United States in 1992, and Printz v. United States in 1997. The most recent application of the doctrine came in the 2018 decision in Murphy v. NCAA regarding New Jersey’s commencement of legal sports betting despite federal prohibition of the same. The U.S. Supreme Court sided with Jersey, ruling that “Congress may not simply ‘commandeer the legislative process of the States by directly compelling them to enact and enforce a federal regulatory program.”

I think the DCC is right about the anti-commandeering principle. I think the weakness though is around interstate commerce, and the DCC can’t ignore the 2005 Raich case, which holds that Congress’ Commerce Clause authority includes the power to prohibit the local cultivation and use of cannabis in compliance with California law.

The DCC likely rightly points out, however, that the foregoing doesn’t matter for the State. The State and its officials are highly unlikely to be prosecuted for anything at all. At most, the federal government might sue California to try to overturn SB 1326 (although I don’t see that happening under President Biden’s DOJ). Private citizens are the ones who will be on the line for enforcement because California wouldn’t act if the feds started punishing people for moving inventory under SB 1326 (that’s also why no positive conflict exists).

I think even if the DCC is successful in getting a positive opinion from the State A/G,  what really matters is what enforcement by the DOJ (which is essentially controlled by the U.S. Attorneys in each District) looks like for private cannabis enterprise. In all, interstate cannabis agreements may be a political win for California, they will mean nothing if the DOJ doesn’t also play ball when it comes to enforcement.

For more on cannabis interstate commerce legislation, check out the following posts:

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