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| Tom Firestone |
"You have a row of dominoes set up, you knock over the first one, and what will happen to the last one is the certainty that it will go over very quickly."
—Dwight D. Eisenhower
What did this election do for the marijuana industry?
A lot.
Four states — three traditionally red — voted to legalize recreational marijuana while a fifth, one of the reddest, voted to legalize medicinal marijuana.
These reforms will likely create a domino effect, leading other states to reform their laws and will likely also force change at the federal level.
In short, the elections could mark a turning point for marijuana law and policy throughout the United States.
What the States Did
Three traditionally red states, Arizona, Montana and South Dakota — plus New Jersey — voted to legalize recreational marijuana, while Mississippi voted to legalize medical marijuana.
In Arizona, marijuana reform received approximately 300,000 more votes than either presidential contender.
In New Jersey, it received approximately 130,000 more votes than President-elect Joe Biden and approximately 800,000 more than President Donald Trump.
Medical marijuana initiatives in Mississippi and South Dakota also received more votes than either presidential candidate.
Recreational initiatives in Montana and South Dakota received more votes than Biden, but not Trump.
The State Domino Effect
Legalization in one state pressures nearby states, envious of the tax revenue and not wanting to be on the losing side of interstate bootlegging, to reform their own laws.
Legalization of recreational marijuana by Washington and Colorado in 2012 contributed to recreational legalization in Oregon in 2014, while 2016 saw recreational legalization in Nevada and California and medicinal legalization in Montana.
Similarly, Massachusetts voters' decision to legalize in 2016 contributed to legalization in Maine and Vermont —both in 2018.
According to Rhode Island Senate Majority Leader Michael McCaffery, that state's "policy of prohibition no longer makes sense with Massachusetts moving toward a robust legalization system."[1]
Not surprisingly, in the wake of New Jersey's vote, the governors of New York, Pennsylvania and Connecticut all expressed support for adult-use legalization.
As Connecticut Gov. Ned Lamont stated:
Right now, I'm surrounded by states where marijuana is already legal. I don't need a lot of people driving back and forth across the border."[2]
In anticipation of New Jersey's vote, Pennsylvania Lt. Gov. John Fetterman stated:
New Jersey is going to legalize marijuana, and 40% of our population will live within a 30 minute drive or less of legal marijuana ... we should reap the benefits, not New Jersey.[3]
And New York Gov. Andrew Cuomo, long a proponent of a coordinated regional approach to legalization, said on Nov. 4 that the time is now ripe for New York to legalize recreational marijuana.[4]
The effects of a mid-Atlantic domino effect would be enormous.
The combined population of New York, Pennsylvania and Connecticut is approximately 36 million, more than 10% of the U.S. population.
With states struggling financially in the wake of COVID-19, the tax revenue generated by legalization in these states may be too attractive to pass up.
Illinois recently announced that it has collected more than $100 million in recreational tax revenue since legalizing recreational marijuana sales on Jan. 1.[5]
Cuomo estimates that recreational sales in New York would generate $300 million.[6]
Arizona's decision to legalize is already creating reform pressure throughout the Southwest. For example, the Drug Policy Alliance is using legalization in Arizona to push for reform in neighboring New Mexico, explaining:
Arizona will join Colorado as a destination for New Mexicans to purchase legal cannabis ... New Mexico will continue to see an outflow of dollars that could instead be cannabis tax revenue.[7]
Even Texas, traditionally one of the most conservative states on marijuana reform, seems to have been prompted by the Nov. 3 results to consider legalization.
In the week following the elections, nine new bills on marijuana reform, including one that would allow for both medical and recreational use, were introduced in the Texas Legislature.[8]
Federal Consequences of State Reform
The November state votes will also have significant consequences at the federal level.
First, the risk of federal enforcement will decrease. State legal medical businesses are protected against federal enforcement by the Rohrabacher-Blumenauer amendment, which continues to be extended by congressional continuing resolution, and which prohibits federal authorities from using congressionally appropriated funds to investigate or prosecute state legal medical businesses.
Therefore, state legalization of medical marijuana necessarily means that there will be fewer medical marijuana businesses subject to federal investigation and prosecution.
In addition, the Biden administration will almost certainly reinstate the Cole memorandum, the U.S. Department of Justice policy of not prosecuting state-compliant marijuana businesses, whether medical or recreational, unless they implicate one of eight federal prosecutorial priorities.
Therefore, as with medical marijuana, state legalization of recreational marijuana will also result in fewer businesses subject to federal investigation and prosecution.
Cases implicating one of the Cole memorandum priorities are also likely to decrease. For example, one of the priorities is:
[p]reventing the diversion of marijuana from states where it is legal under state law in some form to other states [i.e., where it is not legal].[9]
With marijuana illegal in fewer states, there are likely to be fewer cases of diversion from legal to illegal states.
A hands off enforcement approach at the federal level will, in turn, accelerate the state domino effect. As Arkansas Gov. Asa Hutchinson explained:
As long as the federal government is saying 'We're just going to turn a blind eye to whatever the states say,' then it's going to continue that pressure [to legalize marijuana at the state level] - because there's so many dollars that go with that, that they're going to continue to have those initiatives.[10]
Second, demand for federal legislative reform will likely increase because more state legal businesses means more stakeholders with an interest in federal protection.
After the election, 10 more senators — including five Republicans — will represent states that have legalized marijuana in some form, while only 12 senators will represent states that have not liberalized marijuana laws in any way.
While full federal legalization is unlikely for a variety of reasons — including Biden's historically ambiguous position on the issue, likely vocal opposition from some Republicans, and the conflict that it would create with US international treaty obligations — other, more modest, reforms are possible.
These include (1) extension of the Rohrabacher-Blumenauer amendment to recreational businesses, (2) passage of the STATES Act, which would protect state legal businesses from federal prosecution and (3) passage of the SAFE Banking Act which would create a safe harbor for banks to accept deposits from state legal businesses.
All of these measures will have greater chances of passage if the Democrats take control of the Senate. But even if the Republicans maintain control, certain reforms may pass, especially given the increased number of Republicans who now represent legal states.
Even prior to the 2020 elections, when considered by the House of Representatives in 2019, the SAFE Banking Act received 91 Republican votes — 102 Republicans voted against.[11]
It never received a full Senate vote largely because of concerns raised by Senate Banking Committee Chair Mike Crapo, R-Idaho.[12]
If the Republicans maintain control of the Senate, it is expected that Crapo will become chair of the Senate Finance Committee, with chairmanship of the Senate Banking Committee passing to Sen. Pat Toomey, R-Penn
In contrast to Crapo, Toomey represents a state that has legalized medical marijuana and that is now under pressure to legalize recreational marijuana.
Also in contrast to Crapo, Toomey has expressed support for the act, recently commenting:
I am sympathetic to the idea that people who are involved in the cannabis industry – in an entirely legal fashion…ought to be able to have ordinary banking services.[13]
If the Democrats take control of the Senate, chairmanship of the Senate Banking Committee will pass to Sen. Sherrod Brown, D-Ohio, who has also expressed strong support for the act.[14]
What Does This Mean for the Industry?
As a result of the 2020 elections, the marijuana industry is more likely than ever to accelerate its exponential growth.
The markets are already reacting, with stocks of several cannabis companies increasing substantially since Nov. 3.[15]
However, full federal legalization appears unlikely in the near future and strict compliance with state law will provide the best practical — though not necessarily legal — protection against the risk of federal prosecution.
As a result, despite Nov. 3, thorough due diligence on business partners who claim to be state compliant is as important as ever for market participants. [16]
Tom Firestone is a partner at Baker McKenzie.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] https://urldefense.com/v3/__https://www.bostonglobe.com/2020/11/06/metro/senate-leaders-withstand-challenge-outline-progressive-agenda/__;!!Hj9Y_P0nvg!A1FxLM5BtPVPvuhUSqwc_2qKeSRTP-UNw-pE-VVUaolBnnpjt1h5x5E1O5MESQ5VyLoPYj10Dlc$
[2] https://urldefense.com/v3/__https://finance.yahoo.com/news/connecticut-would-consider-legalizing-marijuana-says-governor-172312143.html__;!!Hj9Y_P0nvg!ErvExTq1tQwrDvAANp18iq4NuLd-Ni74QEFybrqWsKUHaNeEihW9QsKb3KR9ydQP6FJW_w-PhLk$
[3] https://www.phillyvoice.com/pennsylvania-marijuana-legalization-wolf-fetterman-new-jersey-referendum/
[4] https://www.amny.com/politics/cuomo-conditions-ripe-marijuana-legalization-2021/
[5] https://www.chicagotribune.com/marijuana/illinois/ct-biz-marijuana-illinois-tax-revenue-20201014-kwokxzqecncancf3gryvhzwfve-story.html
[6] https://www.democratandchronicle.com/story/news/politics/albany/2020/10/23/marijuana-legalization-could-help-ny-budget-andrew-cuomo/3719111001/
[7] https://drugpolicy.org/press-release/2020/11/statement-drug-policy-alliances-emily-kaltenbach-arizona-legalizes-adult-use
[8] https://www.chron.com/politics/article/Texas-marijuana-legal-to-buy-decriminalize-15719036.php
[9] https://www.justice.gov/iso/opa/resources/3052013829132756857467.pdf
[10] https://urldefense.com/v3/__https://www.marijuanamoment.net/federal-government-to-blame-for-more-states-legalizing-marijuana-arkansas-governor-says/__;!!Hj9Y_P0nvg!HpJ_vPEyBZ3DUMsFapVzermH9z3TxRP4SIGrKsAUn327xomVQA9UBslvAbTR7NhvB90XTXlfIsI$
[11] https://www.govtrack.us/congress/votes/116-2019/h544
[12] https://www.banking.senate.gov/newsroom/majority/chairman-crapo-outlines-concerns-with-cannabis-banking-legislation
[13] https://www.marijuanamoment.net/senate-should-take-up-marijuana-banking-bill-gop-lawmaker-who-could-chair-key-committee-says/
[14] For example, in a hearing on the SAFE Act in 2019, Brown stated "Without access to the banking system, legal cannabis businesses are forced to operate in the shadows, dealing with large amounts of cash. This puts a robbery target on the backs of workers and creates a safety hazard for communities. It can also make it harder to monitor transactions and combat money laundering." https://www.banking.senate.gov/imo/media/doc/Brown%20Statement%207-23-19.pdf
[15] https://www.cnn.com/2020/11/24/investing/cannabis-stocks-biden-election/index.html
[16] https://globalcannabiscompliance.bakermckenzie.com/2019/09/12/cannabis-due-diligence-i-four-lessons-learned/; https://globalcannabiscompliance.bakermckenzie.com/2019/09/16/cannabis-due-diligence-ii-a-checklist/
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