Marijuana Legalization: Could 2016 Be The Year Federal Law Derails The Cannabis Movement?

DENVER — Two years into Colorado’s experiment with legalized cannabis, marijuana has become a bit passé. Marijuana stores have lost their novelty, and no one remarks anymore when there’s the tell-tale aroma in the air. People puff on portable vaporizers everywhere you look: in bars, on the sidewalk, or while stuck in traffic on the way home from work. It’s impossible to know whether they’re inhaling tobacco or cannabis — nor does it matter, legally. Decades of social stigma have evaporated; all signs indicate legal marijuana is here to stay.

But several developments over the past few weeks suggest that legalization might not be as stable and permanent as it seems. Last week, a federal judge dismissed a lawsuit that aimed to help launch the world’s first marijuana credit union. The ruling came on the heels of the settlement of a racketeering lawsuit that could be among the first of many to plague cannabis businesses, and a post office threat to forbid all marijuana advertising from going through the mail. All three events are reminders that marijuana markets around the country are built on shaky ground, and 2016 could be the year that these precarious arrangements show ever more signs of wear, or even in some cases come tumbling down.

That’s because the seemingly unstoppable force that is the marijuana legalization crusade is finally hitting the immovable object that is federal law. While lawmakers and business stakeholders have proven adept at creatively building state-by-state marijuana regulations and industries where none before existed, as recent events make clear, there is only so far they can go before running headfirst into the fact that, according to the U.S. Controlled Substances Act, the product at the center of all this action is still 100 percent illegal.

“The thing I always tell people is [federal illegality] hangs over everything in the industry,” said Sam Kamin, a professor specializing in marijuana law at the University of Denver. “There is this cloud that hangs over the industry, and occasionally it rains.”

Right now, those storm clouds appear to be gathering on the horizon. Will it be enough for officials at the federal level to clarify marijuana’s precarious legal standing once and for all, or is the industry bound to be beset by more tempests and turmoil in the year ahead?

Post Office Woes and Courtroom Battles

The problems began in late November when the U.S. Postal Service in Portland, Oregon, issued a memo announcing that all materials with marijuana advertisements were “nonmailable” because of federal law. That spelled trouble for the many periodicals that have come to rely on marijuana advertising revenue and use the mail to reach many of their subscribers. In December, Thomas J. Marshall, general counsel for the USPS, clarified matters by issuing a new nationwide policy noting that while “advertisements for the sale of marijuana are nonmailable,” the most post office employees can do about it is warn people about the rules and let law enforcement know about instances where the law isn’t being followed. Postal workers can’t actually stop such materials from being mailed, noted Marshall: “Postmasters and managers of Business Mail Entry are not permitted to deny entry to such matter or exclude it from the mail.”

The policy should keep newspapers with marijuana ads flowing through the mail, said Colorado Press Association attorney Steven Zansberg. “The postal service is not a criminal law enforcement agency,” he said. “It doesn’t decide who is subject to the nation’s criminal laws.”

But the snafu hints at other bureaucratic hassles that could lie in the future for marijuana enterprises. Which other seemingly simple administrative processes — governmental or otherwise — could be complicated because of confusion over marijuana laws? Could marijuana users be systematically denied student loans or gun permits? Could charitable organizations outright deny donations from cannabis-related businesses? Could the Federal Communications Commission forbid any commercials having to do with pot? (Some observers say marijuana advertising limits would be a good thing; do we really need the cannabis versions of Joe Camel and Spuds MacKenzie?) “I think we are going to see more and more of these problems,” said Zansberg. “As each federal agency confronts this issue, there are inevitably going to be additional skirmishes.”

Other marijuana battles are likely to be fought in the courtroom. That’s thanks to a Colorado racketeering lawsuit that was quietly dropped by plaintiffs in late December. The suit was one of two filed against Colorado marijuana businesses and affiliated enterprises last February, and usually, the end of such a lawsuit is good news for those being sued. But in this case, the suit was dismissed because its damage had already been done. It was filed by a hotel owner in the mountain town of Frisco against Medical Marijuana of the Rockies because the shop planned to move into a building near the hotel. The plaintiffs also sued the marijuana shop’s bank, bonding firm and accounting company, since under the Racketeer Influenced and Corrupt Organizations Act (RICO), these businesses could be considered part of an organized crime ring. The three affiliated companies were eventually removed from the suit after they either severed ties with the marijuana business or reached cash settlements with the plaintiffs; Medical Marijuana of the Rockies never ended up moving and shuttered its old location because of the legal battle. The hotel dropped the lawsuit because it had “basically recovered more in damages than it had actually sustained,” said a lawyer for the plaintiffs.

While some legal experts questioned whether the lawsuit would have held up in court, the fact that it did so much damage not just to a marijuana enterprise but others who did business with it long before the judge ruled on it means RICO lawsuits could be a grave danger for the industry. Why would anyone want to be affiliated with a marijuana operation if it means they could be sued for organized crime? “RICO is the big deal here,” said Pat Oglesby, a tax attorney who studies marijuana at the Center for New Revenue in North Carolina. “The threat of being sued for that kind of tangential involvement with marijuana commerce could be paralyzing. These are probably not frivolous lawsuits that would allow the defendants to sue the plaintiff for damages for abuse of process.”

The marijuana movement suffered another defeat in U.S. District Court last week. The Denver-based Fourth Corner Credit Union, which aims to become the world’s first bank focused on the cannabis industry, sued the U.S. Federal Reserve Bank of Kansas City, Missouri, after it denied the credit union a master account, which is necessary for routine banking services. But after hearing oral arguments in the case, U.S. District Court Judge R. Brooke Jackson dismissed the lawsuit last Tuesday. While Jackson was sympathetic to Fourth Corner’s cause — he noted in his decision that the current marijuana banking situation is “untenable and hope that it will soon be addressed and resolved by Congress” — he concluded he couldn’t require the Federal Reserve to issue a master account to a bank that would be participating in an illegal activity. While the U.S. Treasury Department has suggested banks could work with marijuana businesses if they carefully track their activities, Jackson noted that “these guidance documents simply suggest that prosecutors and bank regulators might ‘look the other way’ if financial institutions don’t mind violating the law. A federal court cannot look the other way.”

The Fourth Corner lawsuit likely isn’t over. Last Friday, the credit union filed a motion to alter or amend the judge’s order and judgment, noting that it needs the court to rule on several other issues in the suit in order “to preserve these issues for appeal.” But Jackson’s decision is still a major blow for the marijuana industry. Federal judges have already ruled that marijuana’s illegality means people can be fired for cannabis use and marijuana businesses can’t receive bankruptcy protection. Now it appears marijuana operations aren’t even legally entitled to banking services, even though lawmakers of all political bents agree such services are desperately needed. According to Marijuana Business Daily poll, 60 percent of marijuana companies don’t have bank accounts. Thanks to Jackson’s ruling, that number could increase.

Time For Federal Action?

It’s possible that these recent setbacks for the marijuana industry could have a silver lining, if they spur those in Washington to iron out the conflicts between federal marijuana law and the growing number of states that have legalized medical or recreational marijuana. The Obama administration’s hands-off approach to state marijuana regulations has allowed dispensary markets to flourish around the country, but it’s going to take proactive federal action, such as removing marijuana from Schedule I of the Controlled Substances Act, to do away with the industry’s legal predicament once and for all.

But most experts aren’t optimistic that we’ll see that political solution anytime soon. Despite growing public support, marijuana is still too dicey a subject for anyone at the national level to make cannabis reform a top priority. “It’s hard to do anything substantial in an election year in the best of circumstances,” says Jonathan Caulkins, a Carnegie Mellon University professor who studies marijuana policy. “I am not aware of any evidence that the current administration has a desire to push for what would straighten this out with a legislative change.”

More likely is that the status quo for the marijuana movement will continue, possibly with more legal defeats and bureaucratic headaches, until after the 2016 election. Only then, if several more major states legalize marijuana, will the federal government likely feel compelled to act on the matter. It helps that several major presidential candidates have appear willing to ease restrictions on the drug: Bernie Sanders has proposed legislation to end federal cannabis prohibition, Hilary Clinton supports rescheduling cannabis, and Rand Paul argues that marijuana regulations should be left up to states.

In fact, despite the problems federal inaction is now causing the marijuana industry, the longer it takes to develop a nationwide solution, they better it might be for those who aim to make money in the cannabis scene. After all, piecemeal legalization, with each state developing its own cannabis regulations, could be more conducive to a freely flourishing industry than a heavy-handed, top-down approach from Washington. “From a public health perspective, a government-run marijuana monopoly would likely be better than the for-profit commercial approach we see in Colorado and elsewhere,” said Beau Kilmer, co-director of the RAND Drug Policy Research Center. “However, many states won’t consider this option because they do not want to put their employees at risk of federal arrest. If the federal government gives a green light to government supply — either by law, waiver, or memo — states may choose this option instead of creating a for-profit industry.”

Then again, federal action on the issue, whenever comes, could end up spelling doom for the marijuana movement. The next president, after all, could decide that he or she isn’t going to look the other way as states around the country flout federal law. And while Jackson, in his Fourth Corner decision, neglected to weigh in on the Federal Reserve’s argument that the Controlled Substances Act pre-empts Colorado’s entire marijuana system, a federal judge could agree with that argument in another court case — such as the remaining Colorado RICO suit or a Supreme Court lawsuit Oklahoma and Nebraska filed against Colorado’s marijuana regulations — and conclude marijuana legalization isn’t in fact legal.

In other words, thanks to conflicts with federal law, marijuana enterprises are entering 2016 lacking the financial services provided to every other modern industry, threatened by RICO lawsuits that could turn them into business pariahs, susceptible to myriad administrative hassles and, depending on shifts of the political winds, at risk of being wiped off the map. It could prove to be a bumpy year.