I thought our subscribers would like to read a paper on the Dormant Commerce Clause and USA cannabis by Robert Mikos of Vanderbilt Law and Scott Bloomberg of University of Maine law school.

They paint a pretty dire picture of what DCC will do to current MSO operating models and suggest adding a sunset clause to any legislation to allow a cleaner transition period. They propose seven years.

A sampling of quotes:

• Once Congress legalizes marijuana, however, the DCC will bring a swift and unexpected end to these insular state-based marijuana markets

• Although the doctrine has recently surfaced in a flurry of lawsuits challenging state residency requirements for marijuana business licenses,19 it has still not dawned on state or federal lawmakers that state laws will be jeopardized by this “arcane”20 doctrine the moment Congress legalizes marijuana.

• Once Congress legalizes marijuana, the DCC will invalidate states’ import-export prohibitions along with an untold number of other state laws that burden interstate commerce in marijuana

• In short, by legalizing marijuana, Congress will instantly—and perhaps unwittingly—transform our current system of insular, state-based marijuana marketplaces into a national, interstate market that is no longer subject to the comprehensive state controls we have today.

• Unless the states quickly figure out how to coordinate their disparate tracking systems to monitor marijuana shipped across state lines—a monumental task—they will have a difficult time detecting such evasion.

• Absent the congressional authorization we envision, a state will not be able to stop out-of-state producers from selling their wares in the local market, even if those producers play by a very different set of rules than the ones the state has imposed on local firms.

As to tracking system… I think if they looked at Federal Alcohol Administration Act they might see how the feds have handled this in alcohol. Namely, inserting an distributor between manufacturer and retailer, with manufacturer delivering goods to distributor’s bonded warehouse. This would clean up their tracking issue, but it would add another layer of disruption to existing models.

They also talk about the sunset clause allowing for a number of benefits. One such benefit is social equity applicants would get some operational footing that would help them attract bank financing before the DCC exemption is retired. IMO, banks are risk adverse. And going to bank with say… three years of operational experience (or less) with a sunset clause striking midnight 4 or less years out… Well, that might give a lender gas that your business model might be changing.

Banks are forever concerned about refinancing risk should a borrower take a down turn. This would add a layer of risk that they might pass on depending on what part of the industry the social equity applicant is in. For instance, less problematic if it was a retailer versus a manufacturer.

Give it a read and let us know your thoughts.