Cannabis companies continue federal legalization push despite marijuana's rescheduling

By Steve Gelsi

Attorney David Boies argues that moving pot to Schedule III won't remove the threat of prosecution for state-legal pot companies

A federal lawsuit challenging nationwide restrictions on marijuana will continue despite a proposal by the U.S. government to lower the classification of cannabis to a less dangerous level of Schedule III, the lead lawyer for the case said Wednesday.

David Boies, the lawyer for plaintiffs in the federal lawsuit by cannabis companies against the U.S. government, said the marijuana-rescheduling effort now underway won't remove the "threat of prosecution" for state-legal marijuana companies.

"It doesn't stop the injury to my clients," Boies said.

The lawsuit argues that the federal prohibition against the drug is unconstitutional because it interferes with state-legal cannabis operations.

Also read: Cannabis stocks rise as U.S. moves to reclassify pot as less dangerous

Boies's comments came during a hearing Wednesday before Judge Mark G. Mastroianni on the government's motion to dismiss the lawsuit in U.S. District Court in Massachussetts.

Since the cannabis companies hired Boies in October, the Biden administration has formally started the process to reclassify cannabis as a Schedule III substance, which would mean the drug has medical use but must be regulated. Other Schedule III substances include codeine and anabolic steroids.

Also read: Tilray to sell a large block of stock as it preps for cannabis reclassification

Since 1970, marijuana has been classified as Schedule I, the same as heroin.

Boies stuck to the main arguments of the case, which cites medical pot businesses in 38 states and legal recreational cannabis in 24 states as a reason to strike down the federal prohibition on pot that has restricted the growth of state-legal marijuana business.

Boies noted that reclassifying cannabis to Schedule III would remove the 280E tax provision that currently prevents legal cannabis companies from claiming standard tax deductions.

Jeremy Newman, a trial attorney for the Justice Department who argued in favor of dismissing the case, said the cannabis trade has no basis in federal law and would be comparable to the argument that nationwide gambling is also a fundamental right.

Newman said rescheduling would open up the door to more research on cannabis, which could lead the U.S. Food and Drug Administration to potentially approve cannabis on a federal level for medical use.

More banks could also decide to provide financial services to cannabis companies if pot is classified as a Schedule III substance, he added.

Boies is the lead lawyer for the lawsuit that Canna Provisions Inc., Wiseacre Farm Inc., Verano Holdings Corp. (VRNOF) and Treevit founder and chief executive Gyasi Sellers filed against U.S. Attorney General Merrick Garland Justice Department in October.

Alongside the plaintiffs, Ascend Wellness Holdings Inc. (AAWH), TerrAscend Corp. (TSNDF), Green Thumb Industries Inc. (GTBIF), Eminence Capital and Poseidon Investment Management are foundational supporters of the suit.

Cowen analyst Jaret Seiberg said he expects that any ruling by Judge Mastroianni will be appealed.

"That is when the real fight will start and when the case will merit closer attention," Seiberg said in a research note on Wednesday.

Litigation is viewed by Cowen as the most likely path to full federal legalization, given the risk around any action by Congress and uncertainty around rescheduling if Donald Trump is elected president in the fall, he said.

Also read: Card payments remain a 'challenge' for legal cannabis as major banks avoid the sector. Changing classification won't help.

-Steve Gelsi

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

05-22-24 1444ET

Copyright (c) 2024 Dow Jones & Company, Inc.