ANALYSIS: Cannabis Lawsuit Targets Congress’s Power Over Pot

Four Massachusetts marijuana companies are suing the US attorney general for a judgment that the Controlled Substances Act is unconstitutional as applied to intrastate cannabis commerce. Such a decision would counter a 19-year-old US Supreme Court ruling and relieve state-legal cannabis companies of unique regulatory and financial burdens that Congress has so far struggled to resolve.

The plaintiffs in Canna Provisions Inc. v. Garland—including industry giant Verano—argue that the legal landscape of today’s national cannabis market would be unrecognizable to the Supreme Court of 2005. It was in that year that the justices decided in Gonzales v. Raich that Congress has a rational basis for intruding on states’ regulation of the cannabis industry, based on three assumptions that no longer withstand scrutiny.

In the nearly two decades since Gonzales, the US legal cannabis industry has blossomed into a $34 billion industry, made up of 40 independently regulated state markets. Despite operating exclusively on an intrastate basis, the entire industry technically violates federal law because, regardless of state-level legalization, the CSA makes it illegal to grow, transport, or sell cannabis anywhere in the US.

Because of this contradiction with federal law, cannabis businesses—including the four suing Attorney General Merrick Garland—are prohibited from accessing federally regulated banks, grants, small business loans, tax deductions, trademarks, bankruptcy protections, and more.

Companies Hope to Reach High Court

The plaintiffs in this case are state-licensed companies in Massachusetts, where cannabis is fully legal. They filed suit in October 2023 in the District of Massachusetts, and their goal is to eventually reach the Supreme Court, which could overturn the Gonzales decision and prohibit the CSA’s application to intrastate markets. While this wouldn’t federally legalize cannabis, it would make it substantially easier—and cheaper—for state-legal companies to operate.

A win for the plaintiffs would also eliminate the need for Congress to pass the SAFER Banking Act, which Bloomberg Intelligence predicts has only a 30% chance of success in 2024, due to House Speaker Mike Johnson’s previous opposition to the bill and federal legalization. This bill would prevent federal penalties for banks that service the cannabis industry, a risk that currently deters most banks from doing so.

A Not-So-Rational Basis?

In Gonzales, the Supreme Court upheld the application of the CSA to intrastate cannabis markets. It ruled that the Commerce Clause permits Congress to intrude on states’ regulation of cannabis because its presence in intrastate commerce substantially affects the interstate market that the federal government intends to eradicate.

To ultimately get Gonzales overturned, the Massachusetts plaintiffs will need to disprove at least one of three Congressional assumptions that the high court relied on in 2005:

• Congress has a rational basis for intruding on state commerce because of its intent to maintain a “closed regulatory system” for cannabis;
• Permitting intrastate cannabis commerce to exist outside of federal regulation would substantially impact interstate cannabis commerce; and
• Cannabis is a fungible commodity.

The plaintiffs say that all three assumptions used by the court in Gonzales have been proven false since 2005.

For example, they argue that the inverse of the second assumption is true: Customers who can purchase legal cannabis in their home state are less likely, not more, to buy from the interstate channels that Congress sought to prohibit.

Addressing the assumption of fungibility, the plaintiffs argue that cannabis is not fungible because of legalization, not despite it. Unlike Gonzales, which evaluated the fungibility of homegrown cannabis, the Massachusetts case focuses on state-regulated cannabis that follows a strict tracking and labeling system from seed to sale, making it entirely distinguishable from its illicit counterpart.

The key assumption of Gonzales, however, is the first one. If the plaintiffs can disprove that Congress intends to “maintain a closed regulatory system” for cannabis, the second and third assumptions will likely fall, too. In their complaint, the plaintiffs argue that without intent to maintain this system, Congress has no rational basis to apply the Controlled Substances Act to intrastate cannabis commerce.

To support this argument, the plaintiffs cite three actions from the federal government: President Joe Biden’s pardoning of all federal cannabis possession charges in October 2022; Garland’s statement that he intends to reinstate the Cole Memorandum in March 2023; and Congress’s annual appropriations bills, which, in every year since 2015, have forbidden the Department of Justice from enforcing the CSA when doing so is inconsistent with state medical cannabis laws.

The plaintiffs argue that for the commerce clause or necessary and proper clauses to justify the CSA’s application to state commerce, Congress must have a rational and lawful purpose for intruding on state regulation, which does not exist in the Gonzales framework without Congress’s original intent. And, even if Congress does still intend to maintain a closed regulatory system for cannabis, its appropriations bills have stripped their authority to do so for medical use. Absent intent, the plaintiffs conclude, the CSA’s application to intrastate cannabis commerce is an unconstitutional overreach of federal power.

New Opportunity for SCOTUS to Limit Congress

Conveniently for the plaintiffs, today’s conservative-leaning Supreme Court is seemingly eager to restrict Congress’s regulatory powers, and the Massachusetts case could present another opportunity to meet that goal.

It’s a long road to the Supreme Court, as the case is just beginning in district court. But this lawsuit may be the quickest route to remedy legal contradictions between state-legal cannabis markets and federal law, given ongoing opposition within Congress. A ruling in favor of the plaintiffs would provide much-needed relief for cannabis lawyers and their clients who struggle to navigate the regulatory landscape of a $34 billion industry that is still, technically speaking, federally illegal.

The Department of Justice has until Jan. 23 to respond to the plaintiffs’ complaint in federal district court.

Even if the Massachusetts lawsuit fails, it’s not the first attempt to lift federal restrictions on state-legal cannabis companies. And as long as Congress continues to drag its feet on federal legalization, it’s unlikely to be the last.

Bloomberg Law subscribers can find related content on our In Focus: Cannabis page.

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