The hazy legal landscape of cannabis

The legality of cannabis varies widely depending on what product is at issue and what law applies. There is significant divergence, and at times direct conflict, between state and federal laws. Under federal law, a slight difference in chemical composition or the marketed use of a product can determine legality. Understanding these legal distinctions is important not only for direct participants in the cannabis industry, including consumers, but also for entities, like financial institutions, that do business with them.

At the outset it is important to define terms and distinguish between marijuana, hemp and cannabidiol, commonly known as CBD. Both marijuana and hemp are derived from varieties of the cannabis plant, and they can be indistinguishable from one other in appearance. The key distinction from a chemical and legal perspective is the percentage of tetrahydrocannabinol in the plant. THC is the primary psychoactive component in marijuana that creates a high. Marijuana is used to refer to varieties of cannabis that contain more than 0.3% THC by dry weight, whereas hemp must contain 0.3% or less of THC. CBD is the other primary component of cannabis, and it can be derived from marijuana or hemp. In contrast to THC, CBD is not a psychoactive component but it is marketed as having medical and therapeutic uses. To date, the Food and Drug Administration has only approved CBD in one drug, Epidiolex, for treatment of epilepsy.

Federal Marijuana Law

At the federal level, marijuana is classified as a Schedule I substance under the Controlled Substances Act. Schedule I substances have a high potential for abuse, no currently accepted medical uses in treatment in the United States, and a lack any accepted safe methods for use under medical supervision. Because it is a Schedule I substance, the CSA prohibits the production, sale, and possession of marijuana. It is also illegal under the CSA to open, use, lease, or maintain any place for the purposes of manufacturing, distributing, or using marijuana. In addition, under federal civil forfeiture law, the government can seize real estate or personal property that constitutes proceeds of marijuana sales or that was used to facilitate marijuana-related business.

In practice, the federal government has exercised its discretion to minimize prosecutions for marijuana-related conduct that conforms to state laws. Federal policy in this regard was established in two memoranda issued by the Department of Justice. The first such memo was issued in August 2013 by then-Deputy Attorney General James Cole. This memo reiterated the government's commitment to enforcement of the CSA but acknowledged that limited resources would require it to prioritize enforcement of certain categories of marijuana-related conduct. Six months later in February 2014, the second memo was released. It emphasized that the priorities referenced in the first Cole memo should guide prosecution decisions under the money laundering statutes, the unlicensed money transmitter statute, and the Bank Secrecy Act. In particular, the memo explained that prosecutions would be appropriate where a financial institution provides services to a marijuana-related business with knowledge of, or willful blindness to, the fact that the business was diverting marijuana to a state where its sale remained illegal or concealing funds derived from other illegal activity. In contrast, the memo explained that prosecution may be inappropriate where a financial institution banked with a marijuana-related business that did not implicate the Cole memo priorities.

In January 2018, Attorney General Jeff Sessions rescinded the Cole memos and directed prosecutors to pursue marijuana related crimes in accordance with generally applicable Department of Justice guidelines. At his confirmation hearing, Attorney General William Barr testified that he did not intend to prosecute entities that had acted in reliance on the Cole memos, but to date he has not released any formal guidance.

The CSA does not distinguish between medicinal and recreational marijuana production or use. However, Congress has elsewhere restricted the federal government's ability to prosecute crimes involving medical marijuana using its power of the purse. Every appropriations bill passed by Congress since December 2014 has included a rider that prohibits the DOJ from spending funds in a manner that interferes with implementation of state medical marijuana laws. This provision has been interpreted by the courts to prohibit prosecutions of individuals who were engaged in conduct permitted by state medical marijuana laws and who fully complied with such laws.

Hemp

Until 2018, with a few limited exceptions, hemp was classified with marijuana as a Schedule 1 substance under the CSA. The few exceptions were for hemp produced pursuant to the 2014 Farm Bill, which authorized certain research institutions and state departments of agriculture to establish pilot programs for the legal cultivation of hemp. In the 2018 Farm Bill, this exclusion was dramatically expanded. First, the 2018 bill explicitly excluded hemp containing .03% or less of THC from the definition of marijuana in the CSA. Second, the bill allowed for the legal production and sale of hemp grown pursuant to a state plan approved by the U.S. Department of Agriculture. In October, the USDA issued an interim rule with the requirements for state plans seeking such approval. Going forward, hemp produced in accordance with such a plan will be legal under federal and state law.

CBD

The legality of CBD is primarily dependent on its source. Marijuana-derived CBD is subject to the same legal restrictions under federal law as marijuana and hemp-derived CBD is subject to the same restrictions as hemp. Notwithstanding CBD's status under the CSA, the FDA has determined that CBD cannot be sold as a dietary supplement or added to any food products, including animal feed, and has issued warning letters to companies marketing CBD products for such purposes. In addition, although such marketing seems ubiquitous, the FDA has concluded that CBD products cannot be marketed to treat diseases or for other medical or therapeutic uses. For products produced and sold solely in intrastate commerce, individual states have taken varying positions on the legality of CBD. California, for example, has prohibited CBD in food products until the FDA has approved CBD's inclusion in food or California independently makes a determination that CBD is safe for human and animal consumption. 