(Editor’s Note: This story is part of a recurring series of comments from professionals in the cannabis industry. Marc D. Hauser is an attorney and vice chairman of the cannabis practice team at Reed Smith in San Francisco.)
You can’t cross state borders with marijuana.
Marijuana made in one state – raw material or finished product, wholesale or retail – cannot be imported from another state or exported for sale in another state.
This is known as interstate trade, and each state’s laws restrict the movement of marijuana to that state.
The background of international trade
Chances are, this won’t be the case forever.
The US Constitution’s trade clause prohibits state laws that unduly restrict interstate trade under a doctrine created by the US Supreme Court known as the dormant trade clause.
Under this doctrine, state laws prohibiting the import and export of state-legal marijuana are almost certainly unconstitutional.
So why do they persist?
States have little incentive to change laws without being forced to do so because they prefer to protect the economic interests of their citizens (although Oregon took the first step to open up to “pacts” for trade with neighboring states).
These laws haven’t really been challenged, probably for the following reasons:
- The cost of litigation.
- The unknown how international trade could affect the value of permits in limited licensing states.
- The even greater unknown of increasing competition in an emerging industry.
These barriers won’t last forever, however – they have fallen in other industries, and they will almost certainly fall into marijuana.
For example, a federal judge recently relied on the dormant trade clause to remove a licensing rule in Portland, Maine that favors citizens.
It’s more about when (before or after federal legalization) and how (by court order or by changing state laws).
What will change with interstate trade?
Who will benefit from international trade? And who is hurt?
The wholesale supply chain could see the more dramatic change in the short term.
Interstate trade could create new demands for highly valued and artisanal products while making it cheaper to manufacture and procure more goods.
Logistics will play a key role in supporting this new wholesale chain.
In retail, the immediate effect is likely to be less.
Interstate retail deliveries, if any, are unlikely to be particularly convenient unless the customer is near the state line.
Even with federal legalization, retailers would likely remain local through licensed stores (similar to licensed liquor stores), and Congress would likely ban marijuana products from being mailed (similar to nicotine products).
However, nationwide distribution could finally enable the brands to reach a broad customer base.
A major unknown is how interstate trade would affect marijuana license values, especially in states with limited permits and full vertical integration.
Seize the opportunity
When trade between states is almost inevitable, how can operators prepare for the opportunity and control its fate?
Granted, it’s hard to strategize if you don’t really know when it’s going to happen.
And if it does, you don’t know exactly what it will look like. Hence, maximizing your adaptability to whatever comes is a key to success.
Here are a few points to keep in mind:
- Scope – Interstate trade could take place before federal legalization, such as through agreements between neighboring states (an idea advocated by the Oregon-based Alliance for Sensible Markets). On the other hand, the market could open up through legal challenges at national level. What should your market be?
- Segmentation – Are you aiming for a nationwide presence or something more regional / local? Do you want to offer a mass market product a low price or a niche that achieves a premium price? Who would your competitors be in these new markets (and your own markets) and where does your product fit in?
- Marketing – Brand awareness has been a daunting challenge for retail marijuana products given the fragmentation of the current market. Do you have a marketing plan to launch your brand in other states? How do you differentiate your product from the (potentially) national competition?
- Partnerships – What kind of relationships could you develop with companies in other countries today? This could include beginning due diligence and understanding other markets, entering into ventures to share branding and know-how, and strategic consolidation.
- Distribution – How do you get your products into these new markets?
- Politics – How can you play a role in steering the conversation about what international trade is like?
- Funding – How are you going to pay for all of these opportunities?
- Legalization – The federal marijuana shutdown (or rescheduling) could quickly lead to a surge of investment, consolidation, and competition that could dramatically affect the way you approach any of these considerations.
The long-term future of the state legal marijuana market will likely be determined by the footprint of interstate trade – and how it interacts with federal legalization.
Marijuana needs to be prepared for this future.
Marc D. Hauser is an attorney and vice chairman of the cannabis practice team at Reed Smith in San Francisco. He can be reached at [email protected].
You can find the previous edition of this series here.
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