On September 18^th, 2022, California passed S.B. 1326, which provided some major implications for the future of interstate cannabis agreements. Additionally, the California Department of Cannabis Control has pushed the Attorney General to allow the interstate transfer of cannabis and cannabis products. This article will explain the law and important future policy changes to look out for.

What are interstate cannabis agreements?

Interstate commerce generally refers to transacting or trading goods, products, services, or money across state borders. While state governments can enter into commercial agreements with other states, Article I Section 8 of the United States Constitution, the Commerce Clause, also grants congress the power to regulate interstate commerce. Moreover, the Supremacy Clause of the U.S. Constitution, Article VI Paragraph 2, clarifies that federal law supersedes state laws where conflicts may arise.

Interstate cannabis agreements are a proposed type of interstate commerce allowing states to export cannabis to other states. However, these agreements may conflict with preexisting Federal laws regulating and prohibiting marijuana.

Federal Law

The Controlled Substances Act (CSA), under Title II of the Comprehensive Drug Abuse Prevention and Control Act of 1970, regulates the manufacture, importation, possession, use, and distribution of certain narcotics, depressants, hallucinogens, anabolic steroids, and other chemicals. The CSA is enforced by the U.S. Drug Enforcement Agency, which has the power to prosecute violators and to manage manufacturers and distributors of controlled substances.

The CSA lists regulated drugs on a drug schedule split into five distinct categories depending on the drug's medical use and abuse or dependency potential. The lists are general references, not a comprehensive list of controlled substances. The Drug Schedule lists drugs as Schedule I-V, with Schedule I drugs having the greatest potential for abuse and Schedule V drugs representing the least potential for abuse. According to the CSA Schedule, “Schedule I drugs, substances, or chemicals are defined as drugs with no currently accepted medical use and a high potential for abuse. Some examples of Schedule I drugs are heroin, lysergic acid, diethylamide (LSD), [and] marijuana (cannabis).”

As a Schedule I drug, marijuana is subject to the enforcement of the DEA and is a federally prohibited substance. Consequently, the federal government maintains the authority to regulate marijuana federally, including the regulation of interstate cannabis agreements.

California Cannabis Law

On September 18^th, 2022, California Governor Gavin Newsom approved Senate Bill 1326 (S.B. 1326) on interstate cannabis agreements. S.B. 1326 adds to and modifies the existing cannabis law in California. The Control, Regulate and Tax Adult Use of Marijuana Act (AUMA) authorizes a person who obtains a state license under the AUMA to engage in commercial adult-use cannabis activity. Additionally, the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) merges the licensing and regulation of commercial medicinal and adult-use cannabis activities. MAUCRSA specifies that the language in its Act shall not be construed to allow a licensee to transport or distribute cannabis and/or cannabis products outside of the state, unless federal law authorizes such transports. S.B. 1326 provides an exception to the prohibition.

What does the S.B. 1326 say?

Senate Bill 1327 allows the Governor to enter into an agreement with other states in the United States to authorize cannabis use for medicinal and/or adult use. This can be between entities licensed under the contracting states' laws and entities operating with a state license.

However, the agreement must meet the following conditions:

(1) The commercial cannabis activities are legal and subject to licensing under the contracting state's laws; and

(2) Concerning the interstate transportation of cannabis and/or cannabis products, the agreement explicitly prohibits both of the following:

(A) Transporting cannabis and/or cannabis products in any other way than those authorized under the laws of the regulating department and the contracting state.

(B) Transporting cannabis and cannabis products through any district, commonwealth, state, territory, or possession of the US that does not authorize that transportation.

In summary, the bill allows interstate cannabis agreements between states where commercial cannabis activities are lawful, and the transportation of cannabis and cannabis products is legal. However, a contract will not take effect unless one of the following occurs:

1. Federal law is amended to allow cannabis and/or cannabis products to be transferred across state lines;
2. Federal law prohibits the expenditure of money that prevents the cannabis and/or cannabis products from being transferred across state lines;
3. The United States Department of Justice issues an opinion or memorandum that allows or tolerates the interstate transfer of cannabis or cannabis products; or
4. The California Attorney general issues an opinion that an agreement for the interstate transfer of cannabis or cannabis products does not pose a significant legal risk to the state of California.

The objective of S.B. 1326, as stated in the bill, is:

-To prevent the illegal diversion of cannabis to other states;

-To reduce the barriers to entry into the legal market for cannabis; and

-To ensure cannabis and cannabis products produced in other states and sold in California meet the same testing and packaging as required under the AUMA.

California Attorney General and the Department of Cannabis Control

The approval of S.B. 1326 shifted power to the California Attorney General, Rob Bonta, to determine that California can engage in the interstate transfer of cannabis or cannabis products without significant legal risk. As a result, the Department of Cannabis Control (DCC) wrote a letter to the Attorney General on January 27, 2023, opining that engaging in the interstate transfer of cannabis would not provide a significant legal risk. This letter is important, as the DCC licenses and regulates:

• The growing of cannabis plants;
• The manufacturing of cannabis products;
• The transportation and tracking of cannabis goods;
• The sale of cannabis goods;
• Events where cannabis is sold or used; and
• The labeling of retail goods.

In the letter, the DCC argues that:

1. The United States Constitution does not allow for the Controlled Substances Act to prohibit California from making commercial cannabis activity with licensees from out-of-state legal and regulated.
2. Federal law further insulates California from significant risk as to agreements concerning medicinal cannabis.

The DCC states that the CSA confers immunity upon "any duly authorized officer of any State ... who shall be lawfully engaged in the enforcement of any law or municipal ordinance relating to controlled substances." This immunity likely encompasses all state laws legalizing and regulating controlled substances.

It remains to be seen whether the Attorney General will agree with the analysis of the Department of Cannabis Control (DCC). However, a decision from the Attorney General can be the catalyst for allowing the interstate transfer of cannabis and cannabis products.

How might the new law impact cannabis businesses?

This new law has opened the door for the California government and the Attorney General to pave the way for the interstate transfer of cannabis and cannabis products. Cannabis businesses should pay great attention to changes in the law because allowing interstate cannabis agreements may provide a great opportunity to expand their business model outside the borders of California. Given that cannabis is recreationally legalized in Washington, Oregon, Arizona, Nevada, and New Mexico, there are many states for which the interstate transfer of cannabis products is feasible within the boundaries of S.B. 1326.

Why is interstate commerce important for cannabis businesses?

Interstate commerce can be hugely important for the future of cannabis businesses and likely change the structure of the cannabis industry. It is possible that allowing the interstate transfer of cannabis will lead to a reduction in the number of cultivators. As a result, a few cultivators of cannabis may emerge as the frontrunners in the industry who provide cannabis to retailers all over the country.

This may be good news for retailers, as it can help them find reliable sources for their products. Additionally, for consumers, a consolidation of cannabis cultivators could lead to a reduction in prices. On the other hand, small cultivators of cannabis may have to fight to be one of the few predominant wholesalers of cannabis.

Future of Interstate Cannabis Laws

Cannabis businesses should monitor state and federal legislation to see how the cannabis industry may be changing, especially in California, where the Attorney General may have the power to allow the interstate transfer of cannabis and cannabis products. Many people have their eye on the federal legalization of cannabis, but there has been little information from the White House to suggest a sudden policy change.

However, over the past few years, some changes suggest the country is moving forward concerning cannabis. For example, on December 2nd, 2022, the House and Senate passed the “Medical Marijuana and Cannabidiol Research Expansion Act." This act was a significant milestone in considering federal cannabis policy and demonstrates that the government is open to having more conversations about the subject.

Conclusion

Cannabis retailers and cultivators in California should keep an eye on the news for changes in the state's cannabis policy regarding interstate commerce. Additionally, the federal government may provide more insight or policy on cannabis regulation for the future.

If you have any questions about what this law may mean for your business, contact our experienced cannabis lawyers today for a free consultation.