Open for Business: DEA’s Proposed Rule Would Make the Agency an Active Buyer and Seller of Marijuana

March 26, 2020By Larry K. Houck

In 2009, Levon Helm, formerly of The Band, wrote and recorded “Growin’ Trade,” a song about a weary, disillusioned American farmer reluctantly staves off bankruptcy by growing illegal cannabis.  Helm nor anyone else could have known that in the ensuing years, a majority of states would decriminalize cannabis, a number of whom would authorize cannabis for medicinal and recreational purposes.  It would have been beyond anyone’s wildest imagination that the Drug Enforcement Administration (“DEA”) on March 23, 2020, would issue a Notice of Proposed Rulemaking (“NPR”) that while issuing additional registrations to manufacture marijuana for research, also involves the agency inserting  itself in the manufacturer-to-researcher equation by buying, taking possession and directing marijuana to researchers.  Controls to Enhance the Cultivation of Marihuana for Research in the United States, 85 Fed. Reg. 16,292 (March 23, 2020).

In summary, DEA finally appears ready to start evaluating applications and issuing DEA registrations to manufacture marijuana for research.  However, to meet the requirements under the international treaties, DEA is proposing to control the distribution of marijuana by purchasing the crops from the manufacturers and then acting as the distribution point to the researchers.  This raises a number of regulatory issues and concerns over how DEA will prioritize the sale and distribution.

For over 50 years, DEA has granted only one manufacturer registration for marijuana, restricting all marijuana production for research to the University of Mississippi, under contract with the National Institute on Drug Abuse (“NIDA”).  DEA issued a policy statement in August 2016 recognizing the increased interest in the research of certain cannabinoids, including cannabidiol, concluding, based on discussions with NIDA and the Food and Drug Administration (“FDA”), “that the best way to satisfy the current researcher demand for a variety of strains of marijuana and cannabinoid extracts is to increase the number of federally-authorized marijuana growers.”  Applications to Become Registered Under the Controlled Substances Act to Manufacture Marijuana to Supply Researchers in the United States, 81 Fed. Reg. 53,846, 53,847 (Aug. 12, 2016).  [See DEA Policy Expands the Number of Marijuana Cultivators for Research, Aug. 17, 2016].

DEA’s proposed rule that would increase the number of marijuana growers for research purposes resulting in a larger, more diverse variety of marijuana for research.  The proposed regulations would allow DEA to evaluate the 37 pending manufacturer applications, establish a program to register additional marijuana growers, and for the agency purchase, take possession and direct marijuana to registered researchers.  DEA, Press Release, DEA Proposes Process to Expand Marijuana Research in the United States (March 20, 2020).  While registering additional growers of marijuana for research is long overdue, that DEA would assume such an active, direct role in the supply chain raises a number of questions as noted below.

We reported last August that DEA was not ready to evaluate the registration applications it had received since announcing in 2016 that it would accept applications and issue registrations to manufacturer marijuana for research.  [See Ease on Down the Road: DEA Still Not Ready to Evaluate Marijuana Manufacturer Registrations, Aug. 29, 2019].  To meet increased demand for research with marijuana, marijuana extracts and marijuana derivatives, DEA has increased the annual production quota for marijuana by 575 percent since 2017, from 472 kilograms to 3,200 kilograms in 2020.  DEA, Press Release, DEA Proposes Process to Expand Marijuana Research in the United States (March 20, 2020).

DEA anticipates approving applications for registration of three types of bulk marijuana manufacturers:  manufacturers who grow marijuana for their own research or drug development; manufacturers who supply marijuana to other DEA registrants; and manufacturers who supply marijuana to support NIDA’s drug supply program.  Id. at 16,295-96.

The NPR explains that because marijuana is a schedule I controlled substance, registration applications to manufacture it are governed by 21 U.S.C. § 823(a).  Controls to Enhance the Cultivation of Marijuana, at 16,293.  For DEA to issue a registration under 21 U.S.C. § 823(a), DEA must determine that the registration is consistent with the public interest based on enumerated criteria and with U.S. obligations under the Single Convention on Narcotic Drugs, 1961 (“Single Convention”).  Id.  Article 28 of the Single Convention requires signatory countries that permit cultivation of the cannabis plant for the production of cannabis or cannabis resin to comply with Article 23 controls, and excludes the cultivation of cannabis for industrial or horticultural purposes.  Id. at 16,294.  Article 23 requires signatory countries that allow the cultivation of cannabis for lawful purposes, such as manufacturing for research, to:

  1. Designate areas and plots of land where they will permit cannabis plant cultivation for producing cannabis or cannabis resin;
  2. Ensure only licensed cultivators engage in cultivation;
  3. Specify through licensing the extent of the land on which cultivation is permitted;
  4. Require cultivators to deliver all their cannabis to the responsible agency, ensuring the agency purchases and takes physical possession of the crops as soon as possible, but not later than four months after the end of the harvest; and
  5. “Have the exclusive right of importing, exporting, wholesale trading, and maintaining stocks of cannabis and cannabis resin,” except the exclusive right need not extend to medicinal cannabis, cannabis preparation, or the stocks of cannabis and cannabis resin held by manufacturers of such medicinal cannabis and cannabis preparations.

DEA already performs the first three functions under the Controlled Substances Act (“CSA”), so to comply with the CSA and issue registrations consistent with the Single Convention, the agency is proposing revising its regulations “to directly perform” the fourth and fifth functions as well.  Id.

So, to comply with the Single Convention, the regulations, if finalized, would require:

  1. Registered manufacturers to deliver the entirety of their cannabis crops to DEA, and DEA to purchase and take physical possession as soon as possible, but no later than four months after harvest.
  2. DEA may accept delivery and maintain possession of the crops at the registered location of the registered manufacturer consistent with the CSA security controls required for schedule I substances.  DEA would designate a secure storage mechanism at the manufacturer’s registered location to maintain possession by controlling access to the cannabis.  If no suitable location exists at the manufacturer’s registered location, DEA would designate a location for the grower to deliver the crops within four months of harvest.
  3. DEA would have the exclusive right to import, export, wholesale trade and maintain cannabis stocks other those held by registered manufacturers and distributors or medicinal cannabis or cannabis preparations.  DEA may authorize registrants to perform such activities.  DEA would require prior written notice of each proposed cannabis import, export or distribution specifying the quantity, and the name, address and DEA registration of the recipient manufacturer or researcher before authorizing the transaction.  Registered manufacturers could not import, export or distribute cannabis without the express written authorization of DEA.
  4. A registered manufacturer must notify DEA in writing of its proposed harvest date at least fifteen days prior to commencement of the harvest.  (A delay of DEA taking possession “would not only increase the risk of diversion, but would also adversely impact the quality of the crop.).  Id. at 16,294-95.

DEA intends to purchase marijuana with funds from the Diversion Control Fee Account and add a variable administrative cost per kilogram to the sales price to end users.  Id. at 16,297.  The merits of this proposition alone could be the subject of its own blog post.

If the proposed rule is finalized as is, DEA would become an active player in these enterprises, constituting a huge leap from the role of an enforcer of federal law regulating marijuana to being responsible for purchasing, possessing and directing marijuana in the research supply chain.  How is this going to work?  Can DEA be both a participant and regulator of the same activities?  Will DEA’s participation be hampered by investigative, administrative and budgetary constraints?  All stakeholders would be best served for DEA to delegate as many of these proposed new responsibilities to registered entities who are better equipped to engage in these activities.

In addition to compliance with the Single Convention, DEA may grant a registration to manufacture marijuana only where the agency determines the registration is consistent with the public interest based on criteria in 21 U.S.C. § 823(a), including limiting the number of registered bulk manufacturers to that which can produce an adequate and uninterrupted supply of marijuana under adequately competitive conditions in order to maintaining effective controls against diversion.  Id. at 16,296.  To fulfil this requirement, a bona fide supply agreement between a grower and registered schedule I researcher would provide evidence that an application is necessary to produce an adequate and uninterrupted supply of marijuana under adequate competitive conditions.  Id.  The proposed regulation defines a “bona fide supply agreement” as “a letter of intent, purchase order or contract between an applicant and a researcher or manufacturer.”  Id. at 16,305.  Applicants seeking to grow marijuana for their own research can meet this requirement by holding a DEA registration to conduct research with marijuana.  Id. at 16,296.  Applicants should be prepared to produce bona fide supply agreements to DEA as part of the preregistration process.

DEA will also determine which applicants to register as consistent with the public interest by  emphasizing the “applicant’s ability to consistently produce and supply marihuana of a high quality and defined chemical composition” and “[w]hether the applicant has demonstrated prior compliance with the CSA and DEA regulations.”  Id. at 16,297.  DEA stated in its 2016 policy statement that “[i]n this context, illegal activity includes any activity in violation of the CSA (regardless of whether such activity is permissible under State law) as well as activity in violation of State or local law.”  Applications to Become Registered, at 53,847. DEA explained at the time that while past illegal conduct involving controlled substances would not automatically disqualify an applicant, “it may weigh heavily against granting” a registration.  Id.  Given all things being equal, it will be interesting to see whether DEA penalizes those applicants who ignored this warning and conducted state-authorized cannabis activities in violation of the CSA by favoring those who did not by granting the latter a registration.

Having received 37 applications since August 2016, how will DEA determine which of those registrations to grant and how to handle additional applications it receives?  “With limited exception,” DEA will first evaluate the applications it has received before the final rule becomes effective, and will not consider applications received after the rule becomes effective until it grants registrations or denies registrations of the earlier applicants.  Id. at 16,297. Because DEA is required to issue a show cause before denying any application for registration, and provide the applicant with a right to an administrative hearing, we expect that a number of applicants will challenge these denials and lead to more litigation.

Neither Levon Helm nor anyone else could not have envisioned in 2009 that DEA would seek to purchase, take possession and direct marijuana in 2020.  Not even for legitimate research.

Electronic comments on the proposed rule must be submitted, and written comments postmarked, on or before May 22, 2020.