Friends – first, a quick note on the news that the FDA, after years of pondering, has decided to not issue any regulations on hemp-derived CBD, and instead let Congress do something about it. Apparently, yelling tuches ahfen tish didn’t do the trick. One can only see the humor in this result.
It will be interesting to see how the hemp industry reacts to this (lack of) news. The 2018 Farm Bill, which legalized hemp in the first place, will be renewed in 2023 and possibly cleaned up, so we’ll see if lobbying efforts shift towards Congress. Separately, I wonder how this will change the CBD products category. With the FDA punting, will companies presume that Congress will be more lenient than the FDA ever would have been, changing the risk profile for larger CPG to enter the space?
Moving from the ridiculous to the sublime, California dropped its own dose of reality by jumpstarting the inevitable transformation of the national cannabis marketplace through interstate commerce. As reported on Monday, California’s Department of Cannabis Control (DCC) sent a lengthy letter to the State’s Attorney General’s office requesting a legal opinion whether interstate commerce “will result in significant legal risk to the State of California under the federal Controlled Substances Act.” In other words, could the State of California allow its citizens to commercially export and import cannabis products and not get the State in trouble with the Federal government?
In my opinion, this is a really big deal. We’ve been talking for years about the problem and inevitability of interstate commerce, because I really do believe that, once state lines open up, the entire cultivation market will never be the same. On the one hand, there will likely be a race to the bottom for the lowest-cost supply, but on the other hand, there will be an ocean of premium products and strong brands available to meet consumer demand. In other words, eventually, when the market finally adjusts, it’ll work like any other wholesale supply chain.
Currently, all of these state laws exist to protect their commercial citizens from outside product, and whether that’s right or wrong from a policy perspective, those laws are most likely unconstitutional (not legal advice). That’s the argument in the Jefferson Packing House lawsuit filed in Oregon in November, which is challenging that state’s barriers to interstate commerce on federal constitutional grounds (i.e., the Dormant Commerce Clause).
What the Oregon case means is that, regardless of California’s next steps, the federal courts could strike down all of these state laws and regulations anyway. Who knows if California is proactively trying to get ahead of the courts (if the Oregon case were appealed, that federal appellate court’s decision (the Ninth Circuit Court of Appeals) could be binding on California as well because California falls under the jurisdiction of Ninth Circuit) by getting its own framework into place. From the State’s perspective, I imagine it’s better to regulate first rather than play catchup.
Even if the California DCC gets its legal opinion to allow interstate commerce, it then has to find another state to play along, and, as a practical matter, that state would probably need to be adjacent (How would you get products to a noncontiguous state? Air travel is under Federal jurisdiction). What other states are going to want to do the same, particularly if they are limited license? And which companies are going to want to take advantage of open borders? Some will only see upside, but it’s the cultivators and manufacturers that need to be thinking long and hard about the effects of this.
No matter what, all of this is going to take a lot of time – states don’t move quickly, nor do courts. At the same time, I’m hoping that this announcement serves as a wakeup call to the industry. I’ve advised companies about this issue before, and I expect that’ll increase as the inevitability of this change becomes more of a reality and operators think about how they’re going to adjust to survive and thrive. There isn’t one simple solution that fits every company, but open borders will impact everyone in the industry.
I’m usually not good at predicting things, but this one, dos hartz hot mir gezogt.
One last thought - perhaps also this could be another motivator for the industry to come together around a coherent, single lobbying strategy for federal legalization. To me, opening up state borders is a bit of a thumb in the eye towards Congress, in a good way.
Be seeing you!
Hauser Advisory provides advice and strategy on business lifecycle events and cannabis industry navigation, tapping into a deep, national network and nearly twenty-five years of dealmaking and capital markets experience.
© 2023 Marc Hauser and Hauser Advisory. None of the foregoing is legal, investment, or any other sort of advice, and it may not be relied upon in any manner, shape, or form. Subscribe to Cannabis Musings at hauseradvisory.com.