To Plant a Seed: The Rapidly Growing Cannabis Industry

To Plant a Seed:

THE RAPIDLY GROWING CANNABIS INDUSTRY

by CHAD bLACKHAM

Despite cannabis remaining illegal under federal law and being classified as a Schedule I drug under the Controlled Substances Act, U.S. legal cannabis sales exceeded $15 billion in 2020 alone, and the industry has already created 300,000 new jobs in the U.S. Given the continuing federal prohibition of cannabis, a natural question arises: “how can a new, federally illegal industry emerge so quickly?”

The first notable piece of legislative reform occurred when California voters passed Proposition 215 in 1996, making California the first state in the union to permit the use of medical cannabis. Since then, 35 states, including Ohio, have enacted similar laws or legalized recreational cannabis use.

Despite being a Schedule I drug, recent years have seen the federal government largely adopting a policy of nonintervention with regard to state cannabis regimes. During the Obama administration, Deputy Attorneys General David Ogden and James Cole promulgated a department-wide policy of non-interference with

The cannabis industry’s growth is also notable in that it reverses a nearly century-long trend in American culture of stigmatizing cannabis usage, both politically and socially. As a consequence, the industry is also more tightly regulated than most and faces unique hurdles pertaining to compliance.

cannabis businesses operating in compliance with state regimes, in a series of documents referred to as the

Ogden and Cole Memos.

Additionally, continuing legislative renewal of the Rohrabacher-Farr

Amendment prohibited the

Justice Department from allocating funds to interfere with the implementation of state medical cannabis laws.

President Trump’s first attorney general, Jeff Sessions, raised concerns among cannabis advocates by rescinding the Cole Memo, though ultimately the administration’s stance remained one of nonenforcement. Then, on June 8, 2016, Governor John Kasich signed House Bill 523 into law, authorizing the creation of Ohio’s Medical Marijuana Control Program. The bill created a unique regulatory triumvirate by assigning oversight of dispensaries to the Ohio Board of Pharmacy, regulation of cultivators, processors and testing facilitates to the Department of Commerce, and regulation of physicians to the State Medical Board. A new Medical Marijuana Advisory Board was also created to provide recommendations on the program.

In late 2018, Congress passed the 2018 Farm Bill. Under the bill, farmers could now grow hemp, defined as cannabis containing .3 percent or less tetrahydrocannabinol, and process cannabidiol derived from such cannabis. The bill also required states to submit proposed regulatory schemes to the U.S. Department of Agriculture for approval and developed a licensing framework for hemp farmers.

Because of the federal prohibition on cannabis, the nascent industry’s rapid growth is all the more eyecatching. The reasons are multifaceted, but a key factor is consumer demand. The first states to legalize cannabis saw high interaction from both domestic and national consumers, the latter of whom often viewed cannabis as a tourist attraction. These states, able to benefit from increased tax and sales revenue, were hesitant to interfere or disrupt. Additionally, the

continuing federal policy of non-enforcement meant that states felt empowered to continue enacting cannabis reform. In many ways, this has led cannabis to be a unique exemplar of the federalist principle that the states should be viewed as “laboratories,” free to experiment with their own laws and policies, and to arrive at the best result.

The cannabis industry’s growth is also notable in that it reverses a nearly century-long trend in American culture of stigmatizing cannabis usage, both politically and socially. As a consequence, the industry is also more tightly regulated than most and faces unique hurdles pertaining to compliance, such as highly technical standards and the threat of state enforcement. Furthermore, because of the federally illegal status of cannabis, regulation is left up to each individual state. Nationally based operations must contend with a patchwork of divergent, and sometimes contradictory, legislation.

As a young industry, cannabis is exceptionally challenged as it faces a regulatory onslaught on multiple, similarly emergent, legal fronts. Cannabis companies must handle and store employee and patient personal information, which invokes numerous state privacy laws. In most states, businesses are generally required to retain employee thumbprints or retinal information, which introduces biometric security laws. Cannabis companies that employ software billing systems and retain patient identifying information must implement security breach and cyberattack protocols. These companies often collect consumers’ telephone numbers for text or call purposes, requiring compliance with the Telephone Consumer Protection Act, which itself was recently subject to fundamental change in the Supreme Court’s ruling in Facebook v. Duguid. The coronavirus pandemic has forced cannabis businesses to adapt to consumer concerns and has necessitated changes including contactless delivery and curbside pickup, with such changes often being made in conjunction with state regulatory bodies such as was the case in Ohio. And the coronavirus has raised additional novel questions regarding the enforcement of force majeure clauses, a boilerplate element of many cannabis contracts.

Although President Joe Biden has stated he does not support full legalization of cannabis, big changes are likely coming down the pipeline in 2021. Cannabis legalization has become a bipartisan issue with a majority of voters on both sides of the aisle in support. Current proposed legislation includes the SAFE Banking Act, which would provide cannabis companies access to FDIC insured banks, and the MORE Act, which would decriminalize cannabis entirely and enact sentencing reform for non-violent drug offenders. Other proposals include rescheduling the status of cannabis. However, states are likely to continue implementing additional legalization measures in the meantime. For example, New York, New Mexico, and Virginia all legalized adult-use cannabis in April 2021.

Despite cannabis facing significant hurdles at the federal level, there is great reason to be hopeful for the industry’s success. The industry has grown exponentially over the past decade, and some estimates project that the market could increase to $100 billion by 2030. Public sentiment continues to evolve in a pro-legalization direction that is likely to chip at the rigid stance historically adopted by the executive branch. Cannabis businesses themselves continue to achieve historic revenue and may soon have greater financial legitimacy following the likely passage of the SAFE Banking Act. Though the industry’s legal evolution is far from established, the next few years point toward increasing success for businesses and greater adoption among states and consumers as cannabis continues to grow to new heights.

Chad Blackham, Esq.

Mac Murray & Shuster cblackham@mslawgroup.com