Cole Memo Wakeup: Cannabis Industry Must Rejoin the Federal Fight

News Analysis: The Cole memo allowed the cannabis industry to focus on business challenges and state-level political efforts. That era is over, argues Paul Roberts. 

To unpack the potential damage from last week’s Cole memo decision—and to plot the best course forward—it helps to understand the memo not simply in political terms, but in economic terms as well.

The memo’s political side is well known. Issued in August 2013, shortly after Washington and Colorado had approved adult-use cannabis sales, the memo provided desperately needed assurances to both state executives (Gov. John Hickenlooper and Gov. Jay Inslee, respectively) that the feds wouldn’t ignore the will of their states’ voters. The two-page memo gave Washington and Colorado enough wiggle room to go ahead with adult-use sales the following year.

‘You guys in the cannabis industry are delusional if you think you’re untouchable.’

Justin Strekal, Political Director, NORML

But the memo also had a critical economic effect: It acted like a Xanax on entrepreneurs and investors. Thanks in part to the political stability created by the DOJ directive, an industry that had worried constantly about federal crackdowns—and had been committed to a long-term strategy of national reform—began to shift its attention and energies to near-term, state-centered business goals.

That shift has been crucial to the sector’s commercial success. But it also opened a gap between the sector’s commercial interests and its political advocates.

Many on the advocacy side of the cannabis community are veterans of previous federal crackdown, while most of today’s cannabis entrepreneurs have known only the relative political tranquility of the Cole memo era. While advocates continued to push for federal reform, entrepreneurs have been consumed by the more challenge of growing a business in a competitive industry.

And that, advocates worry, has fostered a sense of complacency about the potential for a federal backlash.

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NORML Concerns

Many cannabis entrepreneurs don’t seem to appreciate that “they’re operating in a federally illegal market,” says Justin Strekal, political director at the National Organization for the Reform of Marijuana Laws (NORML). “But I’ve been telling people, ‘you guys are delusional if you think you untouchable. You don’t have any protection – there are zero statutory protections that would prevent a US Attorney from coming in and hitting you with a RICO suit.’”

Some of the US attorneys who will make the call on local cannabis policy may be appointed by Jeff Sessions himself.

You could see that gap between political and economic mindsets in much of the reaction to last week’s Cole memo decision. At a single stroke, U.S. Attorney General Jeff Sessions effectively liberated the nation’s 94 U.S. attorneys to enforce federal cannabis law without any of the centralized if informal restraints they’d felt since 2013.

Some in the cannabis sector argued that even the most conservative federal prosecutors were unlikely to go after businesses that have the growing political support of state and local officials. Those companies, after all, are generating thousands of jobs and hundreds of millions of dollars in welcome tax revenue.

But that’s hardly assured. With the demise of the Cole Memo, America’s informal but unified hands-off policy toward state-sanctioned cannabis will now be replaced by a patchwork of local enforcement policy shaped by the philosophy, and ideology, of each of the 94 U.S. attorneys—some of which, it’s worth noting, have yet to be appointed by Attorney General Jeff Sessions’ Justice Department.

San Diego At Risk

Case in point: In California, federal enforcement of the world’s largest adult-use market is divided among four regional districts. Historically, the north and central districts have been fairly tolerant of cannabis, but the eastern and southern districts are more questionable. Indeed, Adam Braverman, a veteran prosecutor who made his name going after international drug trafficking cartels, was recently appointed U.S. attorney for the southern district. That district, which encompasses San Diego and Imperial counties, is home to many new cannabis operations.

Gieringer: Sessions wants a court test.

Those businesses must now “hope [Braverman] doesn’t use the heavy-handed tactics he used against the cartels against the legal cannabis sector,” says Omar Figueroa, a Sebastopol, CA-based attorney with long experience in the cannabis sector.

What’s more, even if most U.S. attorneys leave cannabis operations alone, even a handful of prosecutions could be highly problematic if the cases move up the federal appeals system, where support for cannabis is far from certain. In fact, some cannabis advocates suggest that Sessions’ real strategy here is to provoke a legal fight with a pro-cannabis state that ultimately ends up in the U.S. Supreme Court.

“I think Sessions would probably welcome a Supreme Court case on this whole issue,” argues Dale Gieringer, director of the California office of NORML. Such a case, he says, “would be really problematic for our side, given all the terrible precedents the U.S. Supreme court has established on supremacy of federal law [over state law].”

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Size Matters, and it’s a Problem

More broadly, the anxieties around the Cole memo highlight what might be called the success paradox. As legalization has spread from state to state, cannabis advocates have taken comfort in the sheer size of their sector, which some would say is now too well established to be slowed much by the change of a single federal policy.

And yet, arguably, it’s the industry’s very size and success that made it so political vulnerable. Sessions, for example, was reportedly incensed by the “big business” aspect of the cannabis sector, both in the scale of production as well as its interstate nature. Legal cannabis might not be crossing state borders, but capital, technology, and profits surely are.

‘I do expect to see the larger investors and businesses targeted.’

Kevin Sabet, Co-founder of Smart Approaches to Marijuana

“There does seem to be a real frustration with the nature of the businesses that have emerged under this ‘safe space’ that this [Cole] memo provided,” says Hezekiah Allen, a cannabis advocate and lobbyist in California.

More fundamentally, if federal authorities did decide to crack down on some part of the cannabis sector, its sheer size would make that far easier. The average cannabis operator is much larger and more visible than their pre-legalization predecessors. As important, today’s operators far more enmeshed in complicated business networks and supply chains, any link of which could become the focus of a determined federal investigation or prosecution.

“For a federal prosecutor, it’s a target-rich environment,” says Figueroa, the attorney. In fact, the very characteristics that have signaled the sector’s growing maturity and ambitiousness—everything from sophisticated branding strategies and advertising campaigns to high-end investors’ forums and consulting relationships—could now be used as evidence of “tremendous conspiracies from a federal perspective,” Figueroa says. If there is a lesson from past federal cannabis prosecutions, he says, it’s that “the bigger the dream, the longer the sentence.”

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How Deep Does Support Run?

While much of the discussion has centered on the possible actions by federal officials, Sessions’ move is likely to create huge uncertainties further down the food chain. Much of the day-to-day regulation of the legal cannabis business is carried out by state and especially local government agencies and police departments, many of which set their cannabis policies around an expectation, fostered by the Cole memo, that the feds wouldn’t be raiding farms, shutting down dispensaries, and threatening to sue city and county agencies.

With the memo’s demise, one has to wonder whether we’ll see a falloff in local support for cannabis, particularly among law enforcement officials, politicians, and citizens who may have been skeptical of legalizing cannabis in the first place. Will cannabis critics in local law enforcement see Sessions’ decision as a green light to return to the more intimidation tactics of the past? Will rural communities that have struggled to regulate cannabis grow operations now feel emboldened to, says, deny licenses or take growers to court over controversial issues such as odor?

In fact, the closer you look at the rapidly evolving cannabis business, the more you see places where Session’s move last week could create mischief. Much of the media commentary Thursday focused on whether the loss of the Cole memo will slow the crucial flow of capital into the sector. “I do expect to see the larger investors and businesses targeted,” Kevin Sabet, the vocal anti-cannabis critic, crowed to The New York Times on Thursday morning.

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Fragile Finances

Wall Street, certainly, has taken note: News of Sessions’ move hammered the price of a cannabis-based index fund by 13%, and even pulled down share prices in related sectors, such as fertilizers.

Cannabis players are also nervously watching the impacts on smaller, more mundane business activities. Take, for example, the still-fragile relationship between cannabis operators and the banking community. As of mid-2017, fewer than 400 banks and credit unions, or less than three percent of the U.S. total, have been willing to work with the cannabis farmers, processors, and retailers, according to data compiled by Arcview.

With the loss of the Cole memo, the fear is that some of those financial pioneers may now rethink their pro-cannabis stance. Do they respond to the heighted risk of federal prosecution by raising the fees they charge cannabis customers—already as high as $7,500 a month? Do they dump their cannabis customers altogether?

Many cannabis farmers and retailers last week were insisting they could survive the loss of formal banking—but none were pleased by the prospect. “We don’t want to go back to dealing with millions of dollars in cash,” acknowledged Roy Arms, a Washington State grower. “It’s archaic and unsafe.”

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Time to Return to Federal Reform

It’s precisely these grim scenarios, advocates say, that underscore the need for permanent federal legalization. Yet here, too, Sessions’ move reveals a serious vulnerability: for all the tough talk last week by pro-cannabis lawmakers, it’s far from clear how national legalization is going to move forward legislatively. Congress still has a large anti-cannabis contingent, including in key committee positions. And although there is growing support for permanent federal protections for medical cannabis (in fact, Sessions’ move has catalyzed support among key Congressional holdouts, like Senator Pat Leahy from Vermont), the same isn’t necessarily true for adult-use protections.

‘Cannabis companies need to step up now.’

Kris Krane, 4Front Advisors

Despite the emergence of a leading adult-use bill—the “Ending Federal Marijuana Prohibition Act,” sponsored by Virginia Republican Thomas Garrett and 15 other lawmakers—the bill’s legislative pathway is far from obvious. During a press conference Thursday with members of the Congressional Cannabis Caucus (among them, California Republican Dana Rohrabacher, Oregon Democrat Earl Blumenauer, California Democrat Barbara Lee and Colorado Democrat Jared Polis), no one was willing, or perhaps able, to explain how adult-use legalization, which will require broad bipartisan support, can move forward in what is already shaping up as a bitterly partisan election year.

That’s not to say that some form of federal adult-use protection is out of the question. Even if a full-scale repeal of federal prohibition isn’t in the cards this year, there is plenty of talk about near-term, smaller steps—for example, trying to extend Rohrabacher-Blumenauer protections to adult-use cannabis, as has been proposed by Polis and California Republican Tom McClintock.

Some advocates feel that Sessions’ action and the resulting controversy could be leveraged into a campaign issue that forces reticent candidates and incumbents alike to come out in favor of legalized cannabis or face serious voter backlash. As CA NORML’s Gieringer put it Thursday, “Basically, we have a year to make this a campaign issue for the next Congress.”

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Any such progress on the national level would require a massive and sustained lobbying effort by the cannabis industry itself. That, too, will require some serious changes. The demise of the Cole memo has been widely characterized as a “wakeup call” for a renewed push for federal legalization. But industry insiders acknowledge that such a push would require a strategic shift from an industry, in some respects, has forgotten its roots in the historic push for national reform and is much more focused on instead on state-level politics.

If the Sessions’ move is really going to be a wakeup call, the cannabis sector’s emerging business elite will need to shift its attention from balance sheets and zoning regulations back to the larger, more complicated game of federal reform.

Kris Krane, co-founder and president of Boston-based 4Front Ventures and a legalization veteran, puts it succinctly: “If there are companies out there, people in the industry who have haven’t been supporting reform organizations or reform efforts, but have just been making money on the backs of the political gains that the movement has made over the last 30 years, need to step to step up now.”

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