What does it mean? What’s next?
It was widely reported this week that the Drug Enforcement Administration (DEA) would accept the recommendation of the Food and Drug Administration (FDA) and the Department of Health and Human Services (HHS) and move marijuana from Schedule I in the Controlled Substances Act (CSA) to Schedule III. Our Cannabis Team has been following the rescheduling process closely in our weekly CannaSweep posts. This blog presents our take on what’s happened, what’s likely, and what this might mean for FDA-regulated companies and the foods, dietary supplements, and drugs they make, market, and distribute.
Background on DEA, Marijuana, and Rescheduling
Under the CSA marijuana is currently Schedule I, meaning it has “no currently accepted medical use” and a “high potential for abuse.” It shares Schedule I with substances such as heroin and it is illegal for all uses and applications under federal law except for tightly controlled research.
In October 2022, President Biden issued an Executive Order instructing HHS to undertake a review of how marijuana is scheduled. Both Congress and the executive branch, through its agencies, can reschedule drugs. The CSA authorizes DEA (by delegation from the Attorney General) to “transfer between [] schedules” any drug that meets the criteria for inclusion in the “schedule in which such drug is to be placed,” or to “remove any drug…from the schedules” if it “does not meet the requirements for inclusion in any schedule.” This rescheduling process begins with an 8-factor analysis conducted by HHS under 21 U.S.C. § 811(c) to determine a substance’s abuse potential and whether the substance has any accepted medical uses. The recommendation is then sent to DEA for a decision. In the case of rescheduling recommendation, DEA may maintain the substance in its current Schedule or initiate a rulemaking to change the Schedule.
On August 29, 2023, Bloomberg and then other outlets reported that HHS issued a recommendation to DEA that cannabis be rescheduled from Schedule I to Schedule III. Schedule III drugs, such as ketamine, anabolic steroids, and testosterone, have a “moderate to low potential for physical and psychological dependence,” and may be prescribed by a healthcare practitioner over the phone but are limited to five refills. The leaking of the HHS recommendation was unusual for what is typically a confidential process, leading to speculation that HHS deliberately leaked the recommendation to put pressure on DEA which has, historically, been very hostile to marijuana.
In January 2024, HHS released its full review to a Texas lawyer, Matthew Zorn, who had sued HHS for its release under FOIA. The 252-page release detailed the scientific findings of FDA. The National Institute for Drug Abuse (NIDA) reviewed the findings and concurred with the recommendation to reschedule marijuana from Schedule I to Schedule III.
What happened this week?
The Associated Press, and then other outlets, reported that DEA had concluded its review and had submitted, through its parent, the U.S. Department of Justice (DOJ), a proposed rule to the White House Office Management and Budget (OMB). DOJ Director of Public Affairs Xochitl Hinojosa released a widely reported statement on April 30: “Today, the Attorney General circulated a proposal to reclassify marijuana from Schedule I to Schedule III… Once published by the Federal Register, it will initiate a formal rulemaking process as prescribed by Congress in the Controlled Substances Act.”
The Rulemaking Process
The Office of Information and Regulatory Affairs (OIRA) within OMB is charged with reviewing, among other things, draft proposed and final regulations. OIRA publishes on its Regulatory Dashboard when it has received a rule for review (though the rule itself is not publicly available). As of noon, Eastern Time, May 3, the DEA submission has not been posted to the dashboard. We expect this to occur very soon.
Under an Executive Order, OIRA is supposed to complete its review within 90 days. During this time, stakeholders may request meetings with OMB staff to discuss support for or criticism of the rule under review. Review can be both much shorter and much longer than 90 days (a recent FDA guidance had been under review for 2 years!).
Once OIRA sends the rule back to DOJ and DEA, we expect it to be published in the Federal Register. DEA will accept comments on the rule, typically for 30 to 90 days, (DEA comment periods tend to be shorter than those of other federal agencies). Thereafter, DEA must consider the comments and will then issue a final rule.
DEA timelines for this process vary widely. When, due to abuse concerns, DEA up-scheduled certain hydrocodone products from Schedule III to Schedule II, the process from HHS scheduling recommendation to final rule occurred over less than 12 months. See 79 Fed. Reg. 49661 (August 22, 2014). For the marijuana-derived, FDA-approved drug Epidiolex (containing cannabidiol (CBD) as an active ingredient), the process for down-scheduling, and then finally descheduling entirely took several years.
Given the politically sensitive nature of marijuana rescheduling, and that its genesis was a Presidential Order from October 2022, we expect this rulemaking process to be swift.
What would rescheduling do for marijuana businesses?
Because marijuana is a Schedule I substance, marijuana establishments operate under numerous costly restrictions. In our view, some of the most significant consequences to rescheduling marijuana will be the financial benefits for state-legal marijuana establishments.
The Internal Revenue Code 280E (IRC 280E) imposes a much higher tax burden for marijuana businesses and they are ineligible for certain federal tax deductions. Moving marijuana to Schedule III would significantly reduce these costs and allow for business deductions. In addition, marijuana businesses have often had to be primarily cash businesses (with attendant theft risks) because credit card payment networks don’t allow cannabis transactions; credit card processing providers may start covering marijuana transactions. Federally insured banks that are hesitant to offer services to state-legal marijuana businesses due to the complexity of the Bank Secrecy Act and the guidance of the Financial Crimes Enforcement Network (FinCEN) would not have the same level of reluctance. Currently, federal money laundering criminalizes the handling of proceeds derived from various unlawful activities, including marijuana sales in violation of the CSA.
Similarly, restrictions upon marijuana research will also ease if it is no longer in Schedule I.
No impact upon most FDA regulation
Rescheduling of marijuana will, however, have no impact upon the legality of any cannabis and cannabis-derived substances in FDA-regulated products under the Federal Food, Drug and Cosmetic (FDC) Act. Cannabis in FDA-regulated products is lawful only under the following narrow conditions:
- Approved Human and Animal Drugs. FDA oversees and pre-approves the approval of pharmaceutical drugs derived from cannabis. Marijuana itself is not an FDA-approved drug. FDA has approved one cannabis-derived drug product, Epidiolex (CBD), and three synthetic cannabis-related drug products, Marinol (dronabinol), Syndros (dronabinol), and Cesamet (nabilone). FDA has not approved a marketing application for any other cannabis product or substance, including marijuana, for the treatment of any other disease or condition; “medical marijuana” is an unlawful, unapproved drug under the FDC Act.
- Food/Dietary Supplements: FDA has determined that hulled hemp seed, hemp seed oil, and hemp seed protein powder derived from the hemp form of cannabis are Generally Recognized As Safe (GRAS) and may be added to a variety of foods. Cannabis and other cannabis compounds, including CBD, are otherwise not permissible ingredients in human and animal foods and dietary supplements. Cannabis-containing edibles, including those containing CBD and marijuana, are all unlawful under the FDC Act.
- Cosmetics: FDA does not prohibit topical cosmetics from including cannabis or cannabis-derived ingredients but no cosmetic may contain any poisonous or deleterious substance.
Our first post, What Is Cannabis, explains this complexity in more detail. The mostly unlawful status of cannabis-containing products under the FDC Act is unaffected by whether marijuana is rescheduled under the CSA or even descheduled entirely.
It’s complicated
There are other additional, significant complications and unknowns with the potential movement of marijuana to Schedule III.
- This is the first time a substance has been placed in Schedule III without being covered by an FDA-approved drug application. Schedule III drugs are subject to various CSA restrictions, including that they be dispensed pursuant to a valid prescription. Under state-legal programs, however, marijuana, though heavily regulated, is not a controlled substance at all, and States with adult, recreational use require no prescription. Significant conflicts between state and federal law remain.
- Under the CSA and DEA regulations, entities that manufacture, distribute, or dispense controlled substances must be registered with DEA and comply with regulatory requirements. It is unknown if DEA would require state-legal marijuana establishments to register and comply with registrant requirements.
- Impacts upon traditional pharmaceutical wholesale distributors, pharmacies, and healthcare practitioners are also unknown. Marijuana would no longer be an illicit, Schedule I substance but its distribution, sale, and/or dispensing could still violate the FDC Act and CSA.
- While States would seem to be unlikely to amend their complex and unique programs to treat marijuana as a Schedule III controlled substance when it is already completely descheduled under state law, they may expand their legal regimes for marijuana manufacture, distribution, and dispensing to traditional members of the pharmaceutical supply chain (manufacturers, distributors, pharmacies).
Next week, we’ll do a deeper dive into rescheduling impacts upon FDA-regulated products. If you are interested in exploring commercial opportunities in the cannabis space, we would be happy to assist you with any of your cannabis law questions, comments, or concerns. Please contact Tish Pahl (tpahl@ofwlaw.com), Kyla Kaplan (kkaplan@ofwlaw.com), Denise Calle (dcalle@ofwlaw.com), and/or Ben Dash (bdash@ofwlaw.com) for assistance.
