Industry Voices

Calif. interstate commerce law opens pathway for licensed operators

By Lauren Fraser Coté
Sep 21, 2022
Lauren Fraser Coté provided by Lauren Fraser Coté

This week, Gov. Gavin Newsom signed a bill into law that allows California to enter into cannabis interstate trade agreements for commerce with other medical or adult use states. Co-sponsored by Rural County Representatives of California (RCRC) and the Cannabis Distribution Association (CDA), where I’m a founding board member, the legislation activates California leaders to seek guidance from federal agencies as to how they will (or won’t) respond to states engaging in interstate commerce. While California still has much work to do to strengthen its in-state cannabis market, this legislation applies timely pressure on Congress to legalize federally.

New Jersey introduced similar legislation this year, recognizing that their in-state cannabis production will take several years to catch up with demand. Interstate trade agreements between producer and consumer states, such as California and New Jersey, may offer hope to struggling siloed cannabis markets while giving states the opportunity to pave a path for a federal descheduling. 

By contrast, if cannabis is rescheduled, interstate commerce would be restricted to FDA-approved prescription-only drugs, leaving the diverse array of traditional Adult Use product categories confined to in-state boundaries. Whereas if cannabis is descheduled from the Controlled Substances Act (CSA) these traditional product categories may be sold across state lines.

Nuanced state regulatory frameworks have inherent conflicts with a singular federal system that will aim to maintain constitutionality with the Dormant Commerce Clause (DCC). The DCC prevents the states from adopting protectionist measures in order to preserve a national market for goods and services. Considering existing state regulatory frameworks were designed specifically to avoid interstate commerce, descheduling will result in re-legislating cannabis laws, exposing state governments to lawsuits from companies heavily invested in siloed in-state markets. 

Through the process of negotiating the first interstate trade agreement(s) between markets, state regulators can begin to identify those inherent conflicts and align aspects of their regulations with each other. This is the foundational work that will reduce friction between the federal government and states in the implementation of a federal system. 

Interstate commerce is subject to not only DEA enforcement but also that of the FDA, whose jurisdiction begins when products are shipped across state lines. Under current FDA regulation, compounds that have already been approved in new drugs – such as Delta-9 THC and CBD – cannot be introduced into any food, beverage or dietary supplement shipped across state lines, due to the drug exclusion rule (FDCA code § 331). Only by Congressional action (or a change of heart by the FDA) can exceptions be made to the drug exclusion rule for foods containing cannabis. 

This dynamic might encourage industry operators to double-down on siloed in-state markets, given the FDA has limited jurisdiction on intra-state commerce. However, the longer it takes to legalize, the more time pharmaceutical companies have to introduce new drug trials with additional single molecule active ingredients, at which point those compounds become excluded from being sold interstate in a food, beverage, or dietary supplement. 

If rescheduled rather than descheduled, the prospects for inhalable products present more complex regulatory hurdles, especially inhalation by combustion. If rescheduled, interstate transactions of cannabis flower for recreational smoking might be the only product category that does not trigger FDA jurisdiction, according to professors Seán M. O’Connor and Erika Lietzan in The Surprising Reach of FDA Regulation of Cannabis, Even After Descheduling.

Descheduling is not a foregone conclusion. The financial and political capital behind efforts to reschedule rather than deschedule cannabis from the Controlled Substances Act is the biggest threat to existing licensed cannabis operators, as well as consumers seeking full spectrum and geographic product diversity. The exploration of interstate agreements in the continued environment of federal tolerance will bring us one step closer to federal reform.

We have a lot of work to do to change the course of history, and shape it in the direction that is in the best interest of patients, consumers, small businesses, and the individuals and families most negatively impacted by the War on Drugs; a racist war that has destroyed communities and criminalized a plant with a human history for thousands of years preceding this government, and one that will survive for millennia beyond it. 

Lauren Fraser Coté is a founding board member of the Cannabis Distribution Association and chair of CDA’s Interstate Task Force. In addition to her advocacy work, Lauren has built and scaled statewide cannabis distribution operations in California from the ground-up, including her first cannabis startup, River Distribution (now owned by Cresco Labs). Her latest venture, Smoothee, is a disruptive packaging platform for cannabis flower brands.

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