Cannabis commerce landscape is one of juxtaposition. Thirty-nine states have legally authorized cannabis in some form, but it remains illegal at the federal level and is regulated under the Controlled Substances Act.
Some states, however, are forging a different path: passing legislation that authorizes interstate commerce agreements with other states. California, Oregon, and Washington, for example, are passing laws to edge closer towards interstate cannabis. There are also questions as to whether the agreements run afoul of the Commerce Clause of the US Constitution.
The CSA classifies marijuana as a Schedule I substance and is prohibited by the federal government for private or commercial manufacture, distribution, dispensation, and possession. Despite federal restrictions, 39 states (as well as Washington, D.C.) allow the cultivation, distribution, sale, possession, and use of cannabis—except that, due to the federal illegality of the cannabis market, cannabis sold in a state’s legal market must be grown in-state.
Although several states have their own cannabis markets within their borders, there’s no legal interstate cannabis market comprised of states with legal regimes exchanging commerce. Certain states are seeking to authorize an interstate cannabis market for their licensed cannabis participants through state agreements once certain “triggers” are hit that provide levels of safety from federal intervention and prosecution.
Oregon, Washington, and California have all passed bills that authorize entering into cross-border agreements with other legal-use states upon satisfaction of triggers, though they take varying approaches to imposing home-state requirements. For example, Oregon requires its counterparty state be reachable by car; may require the other estate to establish similar requirements on cannabis producing, processing, and more; and must ensure the other state’s public health and safety standards.
Washington’s bill requires the cannabis to be tested, packaged, and labeled in accordance with state regulations. California’s interstate cannabis law—one of the most eager, with a unilateral trigger—requires contracting states’ licensees to be bound by California public health and safety, track and trace, testing, inspection, packaging and labeling, and adulterated and misbranded cannabis. It also requires the contracting state to impose advertising, marketing, labeling, or sale restrictions that meet or exceed California restrictions.
Some states’ push to integrate a broader interstate cannabis market are driven by a number of factors: supply and demand issues, environmental and financial costs to grow within state borders, economic benefits of first-to-move agreements, tax income for the state, and a more even and market-driven landscape.
But there are also risks, including whether states’ requirements that out-of-state licensees comply with the importing states’ public health and safety and marketing standards violates the Dormant Commerce Clause of the Constitution. The implicit DCC generally prohibits states from passing legislation that discriminates against or excessively burdens out-of-state citizens, especially to protect in-state citizens and businesses. Would requiring out-of-state citizens to comply with another state’s standards excessively burden out-of-state citizens and “protectionist” of in-state businesses?
If we follow the lead of National Pork Producers Council v. Ross, the answer is likely no. In that case, the Supreme Court concluded that a California law requiring out-of-state pork to meet California’s breeding standards of humane treatment was valid, as it appropriately balanced important interests of in-state residents and the burdens out-of-state producers would face to comply. “Companies that choose to sell products in various States must normally comply with the laws of those various States,” the decision says.
This is distinct from another salient DCC issue in the cannabis industry: whether states can impose residency requirements on its licensees. In that issue, states are effectively closing off the market to out-of-state citizens entirely, whereas here, states requiring everyone participating in commerce within its borders to abide by the same state rules.
These interstate cannabis agreements have yet to be negotiated. Issues may arise regarding taxes, the adjudication of regulatory standards, and the overall benefits states may—or may not—obtain from entering these agreements. However, the concept of agreements and requiring importers to comply with state standards likely won’t run afoul of the DCC.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Joseph E. Segilia is a cannabis attorney at Sullivan. He also focuses on corporate and securities matters, including mergers and acquisitions, securities laws and capital markets transactions.
Caroline Lambert is a cannabis attorney at Sullivan. She also focuses on regulatory compliance, white-collar and government investigations, and securities enforcement and counseling.
