A Cannabis Conflict of Law: Federal vs. State Law

A decade ago, the thought of legalized marijuana—even for medicinal purposes—was cutting edge and controversial. In 2021, the conversations around legalized cannabis have dramatically evolved. While there are still critics of legalized cannabis, we have seen a nationwide and largescale embrace of cannabis use ranging from treatment for medical conditions to recreational marijuana. Hemp and CBD products have become mainstream. As of this writing, thirty-seven states, the District of Columbia, and four US territories allow for the use of medical marijuana. Thirteen states and one territory have decriminalized the use of cannabis. Additionally, eighteen states, two territories and the District of Columbia have enacted laws to allow the recreational use of marijuana. Eleven states allow for the use of low THC, high CBD products for medical reasons. These numbers are trending upward, with several states expected to enact various cannabis legalization bills in 2022. Only three states (Idaho, Kansas, and Nebraska) still do not allow the use of cannabis in any capacity.

Despite the overwhelming majority of states allowing for the use of cannabis at some level, the federal legalization structure is lacking. This complex interplay makes it difficult for business lawyers to advise clients whose businesses involve cannabis—whether those clients are legally selling cannabis or if those clients are cannabis-adjacent. This article will explore how the conflict of law between the narrow federal landscape and the expansion of state cannabis laws has created numerous business law complications, including its impact on the banking rules and regulations, and decisions lawyers and bankers must make without clear guidance and direction. Additionally, this article will provide a high-level overview of the questions a business lawyer should be asking, such as: What are the ethical rules that I should be aware of, and what are the areas I need to troubleshoot for my client that I may never have contemplated would be impacted by the changing state-based marijuana laws?

While this article hopes to provide guidance and advice for the business lawyer in the cannabis space, the conflict that exists between federal law and the state laws may present more questions than we can currently answer. However, even with uncertainty in some of the questions raised, this is an area that is growing and evolving, and every business lawyer should be prepared for issues and questions that may arise in this space.

State Law vs. Federal Law

As we examined in the beginning, states have moved towards embracing the use of cannabis. The federal government, meanwhile, has not made the same move. Under federal law, cannabis is still classified as a Schedule I substance under the Controlled Substance Act. This means it is considered to have a high potential for dependency and no recognized medical use. For context, other Schedule I substances include ecstasy, heroin, and LSD. Distribution of a Schedule I substance is a federal offense.

Some progress was made on the federal level with the passage of the 2014 and 2018 Farm Bills. While the Farm Bills did not change the legal classification of cannabis, they did remove hemp from Schedule I of the Controlled Substances Act and permitted states to create industrial hemp programs. There was hope that the Farm Bills would also lead to the Food and Drug Administration (FDA)—which retains regulatory authority over drugs—to issue detailed guidance that would provide clarity on whether (and how) CBD could be used. The Farm Bills, however, have led to more confusion. Many thought that the Farm Bills legalized CBD. The day the 2018 Farm Bill became effective, the FDA released a statement asserting its policy that marketing CBD as foods or dietary supplements remained unlawful. This has led to great consumer confusion and even more uncertainty as the market is now saturated with hemp and CBD products that may or may not actually be allowed under federal law.

In 2021, U.S. Senators Cory Booker, D-NJ, Ron Wyden, D-OR, and Charles “Chuck” Schumer, D-NY, proposed the Cannabis Administration and Opportunity Act as a Discussion Draft (hereinafter the “Draft”). The sponsors indicated that the Draft is in anticipation of a final proposal, which Senate Majority Leader Schumer recently stated would be introduced in April 2022. The Draft would remove cannabis from the Controlled Substances Act and direct the Attorney General to remove cannabis from the list of controlled substances. The Draft would impose a federal excise tax on cannabis products. Importantly, the Draft also contains a number of decriminalization provisions and would allow state-compliant marijuana business to have access to financial services such as bank accounts and loans.

Financial Services Concerns

While this Draft is a significant step towards a comprehensive regulatory scheme, federal action (including its inaction) has already created a conflict of laws in the cannabis space. The federal-state law conflict is particularly evident in the financial services sector. State and federally chartered banks rely on federal agencies for regulatory oversight, insurance and access to funding and payment systems. While a few states have enacted bills intended to protect financial institutions from state financial regulators and other forms of state-wide enforcement in relation to cannabis banking, cannabis remains a federally illegal substance. Thus financial institutions providing banking services to state-licensed cannabis businesses, and even to other companies which sell services and products to those businesses, could find themselves subject to criminal and civil liability under the Controlled Substances Act and subject to regulatory sanctions under certain federal banking statutes.

These risks have significantly inhibited the ability (and willingness) of financial institutions to provide services to cannabis businesses and companies. This limits the ability of cannabis-related businesses—and the financial institutions that want to serve them—to engage in core activities, such as opening accounts, deposits, using checking accounts, accepting credit cards, authorizing electronic transfers, and so on. Some banks and credit unions have cautiously begun entering this market space. While Congress tried to advance a narrow solution through the Secure and Fair Enforcement Banking Act of 2021 (SAFE Banking Act), the bill passed the House of Representatives six times, but has never been taken up in the Senate. Lawyers advising financial institutions that are evaluating whether to offer services to state licensed marijuana-related businesses will need to consider robust risk assessment and compliance programs, along with staying abreast of state and federal law developments.

Other Impacts

In addition to the prime example from the banking space, there are many other areas impacted by the conflict of federal and state laws. For example, the transportation sector is rife with issues. A driver holding federal Department of Transportation certifications and crossing state lines faces a myriad of conflicting state laws and the federal prohibition on cannabis. For example, such a driver could face the loss of their certifications if they test positive for cannabis use, even if they are not intoxicated while driving and if the cannabis was legally used in a state.

There are inherent issues raised in the cannabis space that it is natural for a prudent business attorney to wonder whether they should be doing this work at all. After all, cannabis is still illegal on the federal level. Arguably, a lawyer advising a cannabis company is advising the violation of law and breaking the professional oath they took upon being sworn into the Bar. Most states that have legalized cannabis have provided at least some degree of protection for attorneys who advise clients on how to legally operate within state regulatory frameworks. Some states, like New York, have gone as far as saying that an attorney can not only advise clients, but also accept partial ownership of a recreational marijuana business in lieu of a fee, and when fully legalized, partake of recreational marijuana without jeopardizing their law license. The state rules and regulations are ever evolving, and it is incumbent on any attorney to understand the guiding ethical rules and regulations for the jurisdiction in which they practice. To try to give detailed information in this area is complicated by the ever-changing rules.

Overall, there are many nuances to this ever-evolving issue. The landscape in the cannabis area is constantly changing, and by the time this article is published, some of the information contained herein may have already changed. It is imperative that a business lawyer working in this area stay abreast of each development so that they are properly advising their clients.