Is This the Beginning of the End for Interstate Commerce Restrictions?
California's Interstate Commerce Announcement
The state of California dropped a bomb on Monday morning, and I’m not sure investors fully appreciate what the announcement means and the aftershocks that may follow. I believe this is the first domino to fall setting off a chain reaction that will lead to the end of interstate commerce restrictions in cannabis.
California’s Department of Cannabis Control officially asked the state Attorney General to issue an opinion if interstate commerce causes any additional legal jeopardy to the state.
Before we discuss what this means exactly, let’s step back for a second to consider how cannabis markets have evolved. Ever since states have allowed cannabis sales in direct contradiction with cannabis being Federally illegal, the states collectively restricted cannabis businesses to not sell across state lines. The legal fiction the states adopted was that since it was Federally illegal, they were going to only allow cannabis sales to happen inside their state borders.
The big problem with those restrictions is that under Federal law and especially court rulings of the last 80 years, there is no difference between interstate and intrastate commerce, meaning these restrictions are unconstitutional. And it is up to Congress, not the states to regulate commerce. Cannabis and constitutional expert, Vanderbilt Law Professor Mikos wrote a legal essay on the subject concluding, “that the restrictions legalization states now impose on interstate commerce in cannabis likely violate the Dormant Commerce Clause (DCC).”
In fact, I interviewed him as well. And this video is even more important today than ever.
And a reminder that last fall a very important ruling was released by the First Circuit Federal Court, in which the Court determined that cannabis is an interstate commerce market.
California’s cannabis market has been in a serious depression for over 18 months. I wrote about how it was experiencing its negative crude oil moment.
One of the reasons for struggles in California is that cannabis sales are restricted only to California, and with not enough retail dispensaries, there is nowhere for the excess cannabis to go. This leads to super weird pricing, in which cannabis can sell for $400 to $500 a pound in California but at the same time be selling for $7000 to $8000 a pound in New Jersey or New York, or $2500 a pound in Illinois where there is not enough supply. There is no national market.
Now you have Governor Newsom (and make no mistake about it, this is Governor Newsom leading the charge), basically telling his attorney general to approve interstate commerce. That’s what this announcement effectively was. “Hey, AG, here is all the legal reasoning you need, approve this.” (Not to mention that Attorney General Rob Bonta is pro-cannabis and most likely has been a part of this from the beginning.)
Newsom rightfully sees interstate commerce as an easy way to fix his cannabis industry problems. By allowing California companies access to the rest of the country, Newsom saves the industry and potentially fights the illicit market at the same time. And it also allows Newsom to lead the charge on cannabis reform, which is very popular among voters. And it doesn’t hurt that a market like Florida is closed and run by a potential Presidential adversary in Ron DeSantis.
If Newsom carries the cannabis reform torch, he can be viewed as an executive leader on a very popular issue. Meanwhile, this paints President Biden as someone who is not only behind the times, but someone who hasn’t fulfilled his promises from the last Presidential primaries on cannabis reform. This announcement should pressure the Biden administration to protect their left flank and move on cannabis reform ahead of the Democratic primaries, which could be bruising for an 82-year-old. If not, Biden opens a huge door for Democratic competitors to use cannabis reform against him.
Here is what I wrote last October:
Remember that his campaign promises on cannabis were delivered to secure primary victories. The progressive left sees cannabis as an extremely important issue and sees cannabis through the lens of social justice and the pain and suffering the war on drugs has caused, especially to minority communities. Biden must move forward with something substantive, or he has no chance to be nominated again. He will be “primaried” by someone else who is much more pro-cannabis and will be viewed as “too old to run” or “out of touch.”
Instead of seeing Biden’s move as a way to boost midterm election prospects, instead I see Biden’s cannabis announcement as a tactic to shore up his flank that is exposed on cannabis.
Beyond the Federal implications, if California moves forward and removes interstate commerce restrictions, it most likely frees up waves and waves of companies to sue other states to allow interstate commerce. The biggest problem facing these California companies was that they did not have standing to sue, because even exporting cannabis was prohibited in their own state. That means that first a company would have to sue their own state and state regulators first, to be able to then sue the state they wanted to sell into. Who would want to piss off their own state regulators?
But desperate times call for desperate measures and for the first time, we saw this late last year when one Oregon company did just that and sued the state of Oregon and its regulators. And this article with comments by Professor Mikos is very important to read now. He says:
“It’s a straightforward argument,” Mikos told MJBizDaily. “You have a state law that plainly burdens interstate commerce. Once you accept that, the outcome is obvious,” he added. “The company is going to win, and this ban on the export of cannabis is going to get struck down.”
But if the state of California moves forward, then any California farmer should be able to sue any state and potentially have standing to do so. This means limited license states such as Illinois, New Jersey, New York and Florida may soon be inundated with interstate commerce lawsuits.
And it is not just California, but I hear the states of Oregon and Washington are likely next and they too will press forward with interstate commerce just like California. There are lots of struggling farmers in those three states. I believe all of this will put enormous pressure on the Federal government.
And last September there was someone who told me that all of this was going to happen: Adam Smith with Sensible Markets. He told me that California was going to move on cannabis in early 2023 and he was spot on correct. Go back and listen to that interview. He lays out how this should play out.
Today he said this:
The states have always been the ones to move cannabis reform forward and it will be no different with interstate commerce. All eyes should be on the state of California, as this should move quickly. As Justin Bieber likes to say: I get my weed from California…
Thanks for reading Mindset Value! Subscribe for free to receive new posts and support my work.