Attendees at this year’s Spring Meeting may have been surprised by an unexpected panel: an overview of the status of the law related to the legalization of marijuana and antitrust issues facing the nascent industry. However, a single number explains why the ABA and others are beginning to address a topic that many legal practitioners still view as taboo: $4,000,000,000.00. That’s right, the fastest growing industry in the United States is marijuana cultivation and sale, which currently represents a $4 billion-per-year industry, with $1 billion flowing to Colorado alone. At its current rate of growth, the marijuana industry is expected to dwarf the revenues of the NFL and is poised to grow 10 times, into a $40 billion-per-year industry.
At “Marijuana, Twenty-Three States and Counting,” panel members from various parts of the industry addressed the current state of the law and the legal issues on the horizon. At the core of the legal issues facing the industry is the tension between federal law, which classifies marijuana as a Schedule 1 drug, and the now 23 states that have legalized some form of marijuana. Driving that shift in state law are the 40 million marijuana users in the United States and the 61 percent of Americans who believe marijuana should be legalized who identify this as a major issue to be addressed by lawmakers.
The panel made clear that the vast majority of legal issues facing the industry are rooted in the inconsistent legal treatment of marijuana, both when comparing federal to state law and when viewing federal law across the various agencies and regulations that touch the industry. For example, the Treasury Department has begun to work toward loosening regulations limiting marijuana businesses from engaging in standard banking transactions; meanwhile, however, the IRS has maintained that ordinary business deductions are not available to marijuana businesses (rather, those business may only deduct the cost of goods sold). Other examples include that, prior to opening a marijuana dispensary, applicants in some states must demonstrate ownership or the right to occupy real property on which the dispensary can be located; however, in doing so, such applicants thereby identify assets ripe for potential seizure by federal authorities. While the Patent and Trademark Office will not register any marijuana-related marks, those in the industry must abide by state and federal wage and hour and other labor laws. In addition, marijuana businesses cannot obtain relief in the bankruptcy courts of the United States, and cannot use the United States mail to ship product. The panelists appeared to agree that the conflicts between applicable federal and state laws could swiftly be resolved on the basis of the Supremacy Clause and the inconsistency of certain state laws with federal drug policy – a position the late Justice Scalia expressed when asked about the topic prior to his death. However, it is becoming clear that federal authorities have resisted such resolution.
Issues particularly relevant to antitrust practitioners that are “cropping” up in the industry include boycotts, price fixing, product labeling and false advertising, state-mandated vertical monopolies, limits on output, state residency requirements to operate businesses, and concentration of power at the distributor level. For example, Massachusetts has mandated the vertical integration of operators in the industry, from seed to sale. Colorado has a relatively free market where anyone can apply to grow and sell marijuana, but it requires applicants to grow the vast majority of the plants it sells. (Colorado does, however, impose a two-year residency requirement to sell marijuana.) Other states (for example New York) limit the number of outlets and licenses that will be granted; New York has five licensees that may sell its product through four stores each, resulting in a total of 20 stores for the entire Empire State. And in Ohio, voters recently rejected a legalization bill because it granted exclusive growing rights to an oligopoly of just 10 growers. Needless to say, in light of the aforementioned tension with federal law, aggrieved parties are unlikely to rush into federal court to raise competition claims.
Although the state of the law is in flux and in some cases in doubt, the panel agreed not only on the federal-state conflict as the driving legal issue for the industry, but also that it is ripe for litigation, including partnership disputes, disputes against local governments, and claims under antitrust and competition laws. With $40 billion at stake, there can be hardly any doubt over the panel’s conclusions.