More than four years ago the Drug Enforcement Administration (“DEA”) started down a path by issuing a policy statement asserting that the agency “fully supports expanding research into the potential medical utility of marijuana and its chemical constituents.” Applications to Become Registered Under the Controlled Substances Act to Manufacture Marijuana to Supply Researchers in the United States, 81 Fed. Reg. 53,846 (Aug. 12, 2016). DEA noted increasing public interest in determining whether marijuana or its chemical constituents might be potential treatments for certain medical conditions. Id. DEA concluded, based on discussions with the National Institute on Drug Abuse (“NIDA”) and the Food and Drug Administration (“FDA”), that the best way to satisfy researcher demand for a variety of marijuana strains and cannabinoid extracts was to increase the number of registered marijuana growers. [For our post on DEA’s policy statement, see DEA Policy Expands the Number of Marijuana Cultivators for Research, Aug. 17, 2016]. So at that point the Agency seemed poised to execute on that policy.
Well, DEA has been on a long and winding road with more than a few hazards in the form of Congressional prodding and a Department of Justice (“DOJ”) review of the Controlled Substances Act (“CSA”) and regulations forcing revisions to DEA’s 2016 policy. However, it appears Agency is finally in a position to make good on its policy of registering additional marijuana growers for research with the issuance of a final rule on cultivation of marijuana for research. Controls to Enhance the Cultivation of Marihuana for Research in the United States, 85 Fed. Reg. 82,333 (Dec. 18, 2020) (“Controls”).
Given DEA’s status as an agency within DOJ, it seems extraordinary that DEA would have issued a policy statement on marijuana only to have DOJ then determine that the policy failed to comply with the U.S. obligations under the international treaties. But that appears to be the case. Specifically, as a result of DOJ’s review concluding that DEA’s 2016 policy statement was inadequate to comply with U.S. obligations under the Single Convention on Narcotic Drugs, 1961, as amended by the 1971 Protocol (“Single Convention”), the DEA’s final rule requires DEA to purchase, take possession and distribute cannabis to researchers.
We now wonder where this road will lead given the complexity of DEA’s multiple roles as a regulator, purchaser and distributor of marijuana.
Background
For almost 50 years, DEA has restricted marijuana production to a single registered manufacturer, the University of Mississippi under contract with NIDA, believing that fewer registrants decreased the likelihood of diversion. DEA has noted a 149 percent increase of researchers registered to conduct research with marijuana, marijuana extracts, and marijuana derivatives from 237 in November 2014 to 589 in June 2020 and a 575 percent increase of the annual marijuana production quota since 2017, from 472 kilograms (1,041 pounds) to 3,200 kilograms (7,055 pounds). Id. at 82,336; DEA, Press Release, DEA Proposes Process to Expand Marijuana Research in the United States (Mar. 20, 2020). DEA has authority to register manufacturers of marijuana, a schedule I controlled substance, provided the registration is consistent with the 21 U.S.C. § 823(a) public interest factors and U.S. obligations under the Single Convention. 85 Fed. Reg. 82,334. DEA received 256 comments in response to its March 23, 2020, notice of proposed rulemaking (“NPRM”). Commenters weighed in on a wide range of issues including the application process and registration criteria, marijuana quality, purchase and sale controls and costs. The final rule adopts the NPRM with minor modifications and becomes effective on January 19, 2021. [For our post on the NPRM, see Open for Business: DEA’s Proposed Rule Would Make the Agency an Active Buyer and Seller of Marijuana, Mar. 26, 2020].
Application Process
Over the last four years, DEA has received 38 applications from potential manufacturers after it published the policy statement in August 2016. These applicants believed that DEA had indicated it would start reviewing and making a determination of potential registrations at that time. DEA has stated that it will not consider applications received after January 19, 2021, until it has granted or denied applications received prior to that date. 21 C.F.R. § 1318.05(c) (all regulations under 21 C.F.R. § 1318 will be effective Jan. 19, 2021). We assume DEA is indicating it will review the applications in the order they were received.
Registration Criteria
The CSA states that DEA should register only the number of bulk marijuana manufacturers necessary “which can produce an adequate and uninterrupted supply … under adequately competitive conditions for legitimate medical, scientific, research, and industrial purposes.” 21 U.S.C. § 823(a)(1). However, DEA’s interpretation of the law is not as limiting as it appears. In fact, DEA/DOJ has stated that the CSA “requires the DEA to register an applicant who meets all the other statutory requirements, without regard to the adequacy of competition, if the Administrator determines that registering another manufacturer will not increase the difficulty of maintaining effective controls against diversion.” See, Memorandum of the Antitrust Division of the United States Department of Justice as Amicus Curiae in Support of the Application of Johnson Matthey, Inc., found at https://www.justice.gov/atr/memorandum-antitrust-division-united-states-department-justice-amicus-curiae-support-application
Thus, it will be interesting to see how many entities the DEA decides to register and if the agency makes a determination that the number should be limited based on the ability to maintain effective controls against diversion.
So, how will DEA handle well-qualified applicants who have engaged in marijuana-related activities that were legal under state law but in violation of the federal CSA? DEA explained that any applicant that has manufactured marijuana without a DEA registration has violated the CSA regardless of whether they violated laws of the state where they are located, noting “[s]uch activity is relevant to past experience in the manufacture of a schedule I controlled substance, past experience in preventing diversion of a controlled substance from other than DEA-authorized sources, and the promotion and protection of public health and safety.” Controls at 82,335. DEA further asserted that such prior conduct is relevant and “wholly appropriate to consider” along with all relevant factors on a case-by-case basis in determining whether to issue a registration to the applicant. Id.
DEA has no choice but to consider the public interest factors of 21 U.S.C. § 823(a). There are applicants who adhered patiently to the CSA and DEA’s past warnings. They forewent potentially lucrative opportunities so DEA would consider their application favorably when it was ready to issue registrations to manufacture marijuana for research. DEA’s August 2016 policy statement put applicants on notice when it stated that “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 at 53,847. But DEA’s policy statement did not close the door on those applicants because it also noted that while past illegal conduct does not “automatically disqualify an applicant, it may weigh heavily against granting the registration.” Id.
Conducting marijuana activities compliant with state law that violated the CSA may constitute grounds for DEA to deny an applicant’s registration. We further wonder if DEA, with all other factors being equal might look more favorably upon registering applicants who conducted state-authorized marijuana activities in violation of the CSA but did not violate the enforcement priorities of the Cole Memo than those who violated the Cole Memo? [For further discussion of the Cole Memo, see Up in Smoke? Will the Feds Ramp Up Enforcement Action Against Budding State Marijuana Industry?, January 4, 2018; GAO Recommends Better Monitoring of Federal Marijuana Enforcement Priorities; DOJ and DEA Officials Report on Marijuana Enforcement, February 4, 2016].
DEA also assesses an applicant’s compliance with state law. Applicants must hold a valid state license to manufacture marijuana or explain that a state license is not required. Controls at 82,335.
Responding to commenters’ concerns about marijuana quality, DEA replied that a significant factor for selecting applicants to register is their “ability to consistently produce and supply cannabis of a high quality and defined chemical composition.” Id. at 82,337; 21 C.F.R. § 1318.05(b)(2). DEA will also place emphasis on the extent the applicant can supply quantities and varieties of cannabis and its derivatives to satisfy the anticipated demand of researchers and other registrants as demonstrated through a bona fide supply agreement. 21 C.F.R. § 1318.05(b)(3)(i).
Registration Process
DEA explained the process for issuing marijuana manufacturer registrations. After receiving an application, DEA sends a questionnaire to applicants for them to complete and return within 10 business days. Controls at 82,334. DEA determines whether to grant an application under the 21 U.S.C. § 823 public interest factors by evaluating information provided in the application and questionnaire. DEA then publishes a notice of application in the Federal Register, and current bulk marijuana manufacturer registrants and applicants have 60 days to comment on or object to the application. Id. at 82,334; 21 C.F.R. § 1301.33(a). DEA investigators also conduct on-site pre-registration inspections and report on whether to grant a registration. If DEA proposes to deny an application, it must serve the applicant with an order to show cause providing the factual and legal basis for denial and hold a hearing if the applicant requests one. Controls at 82,335.
Annual renewal and new application fees for manufacturers of marijuana and schedule I substances is $3,699. 21 C.F.R. § 1301.13(e)(1)(i).
Manufacturing Process
In addition to requiring DEA to grant a registration to grow marijuana only if the registration is consistent with the public interest, the registration must also be consistent with U.S. obligations under the Single Convention. Controls at 82,339; 21 U.S.C. § 823(a). The Single Convention requires signatory countries that allow the cultivation of cannabis for lawful purposes, such as manufacturing for research, to:
- Designate areas and plots of land where they will permit cannabis plant cultivation for producing cannabis or cannabis resin;
- Ensure only licensed cultivators engage in cultivation;
- Specify through licensing the extent of the land on which cultivation is permitted;
- 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
- “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. Single Convention, art. 28, 23.
DEA has historically performed, and will continue to perform, the first three functions under the CSA, and NIDA carried out functions three and four. Applications at 53,847. DEA’s 2016 policy statement opined that to register additional cultivators to be consistent with the Single Convention, the cultivators had to agree through written memorandum of agreement with DEA, to distribute marijuana only with prior, written approval from DEA. Id. at 53,848. As a result of DOJ’s review, to comply with the CSA and issue registrations consistent with the Single Convention, the agency revised the regulations for DEA “to directly perform” the fourth and fifth functions as well. Controls to Enhance the Cultivation of Marihuana for Research in the United States; Proposed Rule, 85 Fed. Reg. 16,294. The revised regulations require DEA to:
- Take possession of marijuana after harvest; and
- Maintain the exclusive right to import, export, wholesale trade and maintain stocks of marijuana and its resin. Controls at 82,339.
DEA Taking Possession
Manufacturers authorized to grow cannabis must notify DEA in writing of their proposed date of harvest at least 15 days before the commencement of the harvest and deliver their entire cannabis crop to DEA. 21 C.F.R. §§ 1318.04(c), (a). The 15 days provides DEA with adequate time to travel to the manufacturer to take possession of the cannabis. Controls at 82,341. DEA purchases and takes physical possession of the crops as soon as possible, but no later than four months after the end of the harvest. 21 C.F.R. § 1318.04(a). DEA may accept delivery and maintain possession of the cannabis at the manufacturer’s registered location consistent with maintaining effective controls against diversion. Id. DEA will designate secure storage at the manufacturer’s registered location where it will maintain possession and control access to the cannabis. Id. If no suitable storage location exists at the manufacturer’s registered location, DEA will designate a location for the grower to deliver the cannabis again, as soon as possible but not later than four months after the end of the harvest. Id. Manufacturers cannot distribute cannabis to researchers without DEA. We are curious to see whether DEA headquarters and individual field offices will have adequate resources to participate in purchasing and distributing the cannabis in a timely manner along with fulfilling their other responsibilities.
Manufacturers may distribute small quantities of cannabis to registered analytical labs for chemical analysis prior to DEA purchasing and taking physical possession. Id. 1318.04(d).
DEA has the exclusive right to import, export, wholesale trade, and maintain cannabis stocks, but that right does not extend to medicinal cannabis or cannabis preparations. Id. 1318.04(b). Medicinal cannabis is a drug product made from the cannabis plant or derivatives, and can be legally marketed under the Food, Drug and Cosmetic Act, while a cannabis preparation is cannabis delivered to DEA and converted by a manufacturer into a mixture containing cannabis, cannabis resin or extract of cannabis. Id. 1318.02(b) and (c). DEA can exercise its exclusive right by authorizing registrants to conduct such activities. Id. 1318.04(b). DEA requires prior written notice of each cannabis import, export, or distribution specifying the quantity and the name, address, and registration number of the registered manufacturer or researcher recipient before authorization. Id. Registered manufacturers cannot import, export, or distribute cannabis without the express written authorization of DEA. Id.
Purchase/Administrative Fee
DEA purchases marijuana with funds from the Diversion Control Fee Account and adds an administrative cost per kilogram to the sales price to end users. In setting the administration fee, DEA will annually determine the preceding fiscal year’s cost of operating the program to cultivate cannabis and divide the prior fiscal year’s cost by the number of kilograms of cannabis authorized to be manufactured in the current year’s quota to arrive at the administrative fee. Id. 1318.06(a). DEA adds the administrative fee per kilogram to the sales price of the cannabis purchased from DEA, and the administrative fee is paid to the Diversion Control Fee Account which by statute must recover the full costs of operating the diversion control program. Id. DEA will post updated administrative fees on its website by December 15th of the year preceding the year when the administrative fee will be collected. Id. 1318.06(c).
With having the exclusive right to wholesale trade in cannabis that it purchases from manufacturers, DEA will buy cannabis from manufacturers, sell cannabis to researchers and manufacturers, and establish prices for purchases and sales. The new regulations summarize how DEA will set prices:
- Bulk cannabis growers negotiate directly with researchers and manufacturers to determine a sale price. Upon entering into a contract and prior to the exchange of cannabis, the parties pay an administrative fee to DEA based on the quantity of kilograms involved. 1318.06(b)(1).
- DEA sells cannabis to the buyer at the negotiated sale price plus the assessed administrative fee. The buyer pays the negotiated purchase price and administrative fee to DEA prior to the cannabis purchase by DEA. DEA holds funds equal to the purchase price in escrow until delivery of the cannabis by the manufacturer to DEA. 1318.06(b)(2).
- After receiving the purchase price and administrative fee from the buyer, DEA purchases the cannabis from the manufacturer on behalf of the buyer at the negotiated sale price. DEA has no obligation to purchase the cannabis and may order the manufacturer to destroy the cannabis if the buyer fails to pay the purchase price and the administrative fee if the manufacturer cannot find an alternative buyer within four months of harvest. 1318.06(b)(3).
- When the manufacturer is the same entity as the buyer, or a related or subsidiary entity, the entity may establish a nominal cannabis purchase price. DEA purchases the entity’s cannabis at that price and sells the cannabis back to the entity, or a related or subsidiary entity, at the same price plus an administrative fee. 1318.06(b)(4).
DEA Liability
A number of commenters expressed concern that the regulations exclude DEA from liability for damage that may occur while cannabis is in DEA’s possession, and that there is nothing to ensure the quality of marijuana while in DEA’s possession. Controls at 82,337–38. The commenters note that there is no remedy for damage or loss of cannabis that occurs while in DEA’s possession. Id. at 82,338. The buyer’s sole remedy for defective cannabis is against the grower. 21 C.F.R. § 1318.07. DEA reasoned that risk of loss or damage of cannabis in DEA’s possession will be low because the agency does not anticipate retaining possession for long periods of time and transfer from seller to buyer will be quick in most instances. Controls at 82,338. DEA also expects to maintain possession of the cannabis largely in secure locations designated at manufacturers’ registered locations. Id.
Conclusion
DEA’s eventual registration of additional marijuana manufacturers took a long and winding road. The new regulations have led to opening the door to increase needed quantities and varieties of cannabis for legitimate medical and scientific research. When that door opens, and how wide, remains to be seen. DEA is taking on a large role in the new cannabis program. We have concerns about how DEA’s insertion into the manufacturer-to-researcher equation by buying, taking possession, and distributing marijuana will play out. DEA has often been an impediment in the loosening of cannabis restrictions even for registering additional marijuana manufacturers for research. With the new year, perhaps DEA will assume a new role: cannabis research facilitator.