Medical cannabis is a complex area of US law due to the tension between state and federal laws. While many states have enacted comprehensive programmes allowing the use, cultivation and sale of cannabis for therapeutic purposes, federal law has not kept pace. This ongoing federal-state conflict imposes compliance challenges, legal uncertainties and operational risks for patients, physicians and businesses.

Federal Classification and Prohibition

Under federal law, cannabis is a Schedule I substance according to the Controlled Substances Act (CSA), meaning it is considered to have high abuse potential and no accepted medical use. As a result, its manufacture, distribution and possession remain illegal nationwide – even in states where medical use is permitted.

The CSA broadly defines marijuana to include most parts of the Cannabis sativa L plant, covering medical products regardless of use. Medical professionals and patients technically violate federal law, despite state authorisation. However, federal enforcement has shifted over time through selective discretion.

Federal Non-Enforcement Policies: The Cole Memorandum

The Department of Justice (DOJ) has issued guidance – notably, the 2013 Cole Memorandum – urging prosecutors to deprioritise enforcement in states with strong cannabis laws. Though rescinded in 2018, its principles still influence enforcement. Since 2014, Congress has passed annual budget riders barring DOJ funds from targeting state-legal medical cannabis programmes.

These riders protect only state-legal medical cannabis, not adult use, and must be renewed yearly. Courts have limited their protection to fully compliant conduct, allowing enforcement otherwise. They offer temporary relief but do not change cannabis’s federal illegality.

State Medical Cannabis Laws

Despite federal prohibition, 38 states, the District of Columbia and several US territories have established medical cannabis programmes. These laws vary widely in terms of scope, qualifying conditions, product types and regulatory oversight. Some states offer expansive access with dozens of licences across the supply chain, while others permit only limited low-tetrahydrocannabinol (THC) products or single-operator systems. Licensing structures often include cultivation, manufacturing, testing and retail distribution permits, each with their own compliance standards.

Medical cannabis laws typically require patients to:

• obtain a physician’s recommendation;
• register with a state programme; and
• carry an identification card.

Physicians generally do not prescribe cannabis, as doing so would implicate federal drug laws; instead, they certify or recommend cannabis for use. Some states impose dosage limits, possession caps or condition-specific approvals, while others grant physicians broad discretion. Regulatory oversight is usually housed within state departments of health, agriculture or cannabis control boards.

The 2018 Farm Bill and Legalisation of Hemp

In 2018, Congress passed the Agriculture Improvement Act (the “Farm Bill”), which removed hemp from the CSA’s definition of marijuana. Hemp is defined as cannabis containing no more than 0.3% delta-9 THC by dry weight. This legislative change opened the door to a separate industry for hemp-derived cannabinoids, including cannabidiol (CBD). It also created regulatory fragmentation between hemp and marijuana markets.

The Unite States Department of Agriculture (USDA) oversees hemp cultivation and production through its Domestic Hemp Production Program, while the Food and Drug Administration (FDA) retains authority over finished hemp-derived products, including foods, dietary supplements and cosmetics. However, the FDA has not approved CBD for use in dietary supplements or food products, except for the drug Epidiolex, which treats certain seizure disorders. This creates ambiguity for companies marketing hemp-derived therapeutics without FDA approval. Enforcement is limited but remains a risk, particularly for companies making medical claims.

FDA Oversight of Cannabis-Derived Products

The FDA regulates drugs, foods and dietary supplements under the Federal Food, Drug, and Cosmetic Act. As of 2024, the FDA had approved only a handful of cannabis-based drugs, including Epidiolex (cannabidiol), Marinol (dronabinol) and Syndros. These drugs undergo the FDA’s rigorous approval process and are not part of the broader state-regulated medical cannabis market. The distinction between FDA-approved drugs and dispensary cannabis is significant for legality and insurance reimbursement.

The FDA has issued warning letters to companies marketing unapproved CBD products with therapeutic claims. It has also called on Congress to create a new regulatory pathway for cannabinoids. Current law – the agency argues – does not provide an adequate framework to evaluate the safety of these compounds when used outside drug applications.

Internal Revenue Code Section 280E and Federal Taxation

Another major constraint on medical cannabis businesses is Section 280E of the Internal Revenue Code. This provision disallows ordinary business expense deductions for businesses trafficking in Schedule I or II substances. As a result, even state-licensed medical cannabis operators face extremely high effective tax rates. Only cost of goods sold (COGS) deductions are permitted, necessitating sophisticated accounting practices and tax planning.

The impact of Section 280E limits the appeal of the industry for investors and creates a barrier to entry (due to the high operational costs) that discourages expansion in states with narrow margins. Legislative reform efforts have sought to amend or repeal Section 280E for cannabis businesses, but no changes had been enacted as of 2024.

Transportation and Interstate Commerce

Medical cannabis cannot legally cross state lines, even between jurisdictions where it is legal. The CSA prohibits interstate transport of cannabis, and federal law treats such acts as drug trafficking. This restriction inhibits economies of scale and limits patient access in states with underdeveloped markets. This complicates supply chains and creates regional silos.

Some stakeholders have proposed state compacts or federal legislation to enable interstate commerce. The Cannabis Administration and Opportunity Act and other proposed bills have included such provisions. However, without federal legalisation or significant regulatory reform, these efforts’ objectives remain sought after.

Regulatory Oversight of Medical Cannabis in the United States

Regulatory authority over medical cannabis is divided among several bodies, each with distinct responsibilities. Federal agencies such as the Drug Enforcement Administration (DEA) and FDA set national limits, while state and local governments implement and enforce operational rules. This layered system requires businesses and legal advisers to carefully co-ordinate compliance across jurisdictions.

DEA

The DEA enforces the CSA, under which cannabis remains a Schedule I drug. This classification gives the DEA authority to investigate, seize and prosecute activities involving cannabis, even if permitted under state law. The DEA also regulates Schedule I research licences, affecting scientists and institutions conducting cannabis studies. While enforcement has softened in recent years, the agency retains broad power over medical cannabis activities that conflict with federal law.

FDA

The FDA regulates cannabis-derived products that fall within its jurisdiction under the Federal Food, Drug, and Cosmetic Act. It oversees any cannabis-based product marketed as a drug, food, dietary supplement or cosmetic. To date, the FDA has approved only a few cannabis-derived medications, including Epidiolex. It also issues warning letters to companies making unapproved medical claims or marketing ingestible cannabinoids such as CBD without proper authorisation.

USDA

The USDA oversees hemp cultivation under the 2018 Farm Bill and its Domestic Hemp Production Program. While hemp is legally distinct from cannabis under federal law, oversight of its cultivation directly affects the availability of certain cannabinoids in the medical market. The USDA works with state departments of agriculture to approve and audit hemp production licensing processes. However, it does not regulate finished cannabinoid products.

Internal Revenue Service (IRS)

The IRS enforces Section 280E of the Internal Revenue Code, which prohibits cannabis businesses from deducting ordinary business expenses due to cannabis’s Schedule I status. As a result, the IRS plays a central role in determining tax liability for state-legal medical cannabis operators. The agency frequently audits cannabis businesses and imposes penalties for incorrect deductions. Its authority underscores the financial burden of federal non-conformity.

State Cannabis Control Boards and Health Departments

Each state with a medical cannabis programme delegates enforcement to a regulatory agency – often a cannabis control board, public health department, or department of agriculture. These agencies license operators, inspect facilities, enforce safety and labelling standards, and manage patient registries. They also investigate complaints and impose administrative penalties for violations. State agencies have the most direct influence over day-to-day compliance in legal markets.

Local Governments

Local municipalities regulate cannabis businesses through zoning laws, permits and operating restrictions. Local authorities may ban, limit or conditionally approve medical cannabis operations. They also participate in inspections and enforcement related to building codes, security and nuisance laws. Local approval is often a prerequisite for obtaining a state licence.

Lack of Self-Regulatory Authorities to Govern the US Medical Cannabis Industry

There are no formal self-regulatory organisations (SROs) governing the medical cannabis industry in the United States. Unlike in sectors such as securities or legal services – where SROs such as FINRA or state bar associations enforce rules on behalf of the government – the medical cannabis industry operates without any such sanctioned body. Despite the expanding legal acceptance of medical cannabis across the United States, the industry still operates without centralised oversight. All regulatory authority in this space rests with individual state government agencies, who are tasked with licensing, oversight, enforcement and compliance.

State Regulatory Agencies

Each state that has legalised medical cannabis establishes its own regulatory structure. For example, California’s Department of Cannabis Control (DCC) and Colorado’s Marijuana Enforcement Division (MED) act as primary regulators in their respective states. These agencies issue binding rules, conduct inspections and take enforcement action. Their authority is granted by state statute and not delegated to any non-governmental industry organisation.

Quasi SROs

The absence of national centralised oversight has given rise to a number of quasi SROs that attempt to establish voluntary standards, certifications and best practices. While these bodies lack the power of law, they significantly influence market behaviour and compliance expectations. For many medical cannabis operators, aligning with these SROs is both a competitive advantage and a hedge against inconsistent state regulations.

Quasi self-regulation helps address gaps in government oversight, particularly in areas such as laboratory testing, cultivation standards, manufacturing practices and packaging. These voluntary standards aim to mimic or build upon the frameworks commonly used in other highly regulated industries such as food, pharmaceuticals and agriculture. Participation in these programmes is typically not mandatory but can serve as a differentiator in licensing applications, investor relations and consumer trust. For legal advisers, understanding these frameworks is essential when counselling clients in the medical cannabis space.

Quasi SRO: National Cannabis Industry Association (NCIA)

The NCIA is a leading trade organisation that represents legal cannabis businesses across the USA. While not a regulatory body, the NCIA plays a role in promoting ethical business conduct and developing policy frameworks that influence state and federal legislation. The association provides members with compliance resources, model codes of conduct, and policy white papers tailored to industry-specific risks. It also engages in federal lobbying and public education efforts.

The NCIA’s Medical Cannabis Committee addresses healthcare-related cannabis issues, such as physician education, patient safety and insurance reimbursement. The organisation publishes best practice guides and hosts industry roundtables to inform its recommendations. Though it cannot impose penalties or mandate adherence, its guidance often reflects emerging industry norms. Membership signals a commitment to professionalism and lawful conduct within a largely under-regulated space.

Quasi SRO: Cannabis Safety and Quality (CSQ)

Cannabis Safety and Quality (CSQ) offers formal certification programmes modelled after the Global Food Safety Initiative (GFSI). Its standards focus on cannabis-infused products and edibles, which are particularly relevant in medical markets where patients may ingest cannabis through capsules, tinctures or food. CSQ certification involves multi-level assessments and annual audits to ensure ongoing compliance. The framework is designed to align with international food safety protocols.

CSQ categorises its certification into three tiers: fundamentals, enhanced and advanced. Each tier reflects a different level of operational maturity and readiness for large-scale commercial distribution. These programmes are appealing to medical cannabis manufacturers who want to ensure product integrity and safety. With potential legal exposure from product liability claims, CSQ certification helps mitigate risks and prepare for future federal oversight.

Quasi SROs’ Influence on Regulatory Adoption

While self-regulatory bodies lack enforcement authority, their influence over state policy has grown. Many state agencies now incorporate SRO standards by reference, particularly in areas such as lab testing protocols and manufacturing safety. For example, several states cite ASTM or ISO standards when drafting cannabis rules, while others offer licensing incentives for FOCUS or CSQ-certified applicants. This indirect regulatory impact gives SROs functional authority in shaping the legal landscape.

Legal practitioners should monitor which certifications are gaining traction in their clients’ states of operation. Engaging with SROs early can give businesses a competitive edge in future licensing rounds or inspections. Moreover, adherence to widely accepted standards may reduce civil liability in consumer safety or false advertising lawsuits. As more states integrate SRO-developed benchmarks into formal rule-making, the line between voluntary and required compliance is beginning to blur.

Limitations and Legal Risks

SROs are not without limitations. Their voluntary nature means that they rely on industry buy-in, which may be uneven across markets or sectors. Additionally, the proliferation of competing standards can confuse consumers and regulators, especially when multiple certifications purport to address the same risks. Not all quasi SROs are created equally – some may be more rigorous, transparent or science-based than others.

Businesses should be cautious in selecting which certifications to pursue and should understand the legal implications of each. Legal counsel should conduct due diligence on any SRO before advising clients to adopt their standards or branding. At present, SROs offer guidance – not legal protection – but their role is becoming more influential as federal reform remains stalled.

The US medical cannabis industry continues to grow, though operators face a minefield of legal, regulatory and business challenges. Despite widespread state-level legalisation, the disconnect between federal and state laws creates significant risk and uncertainty. These challenges affect every part of the supply chain – from cultivators and manufacturers to physicians, dispensaries and patients. Legal practitioners advising clients in this space must navigate an evolving patchwork of rules, enforcement policies and structural barriers.

Federal Illegality and the Schedule I Designation

As explained previously, the CSA categorises cannabis as a Schedule I substance, which classifies it as having no accepted medical use and a high potential for abuse. This designation persists despite 38 states implementing legal medical cannabis programmes. Businesses operating legally under state law remain in technical violation of federal law. That conflict creates broad legal exposure and limits access to federal protections and services.

Federal illegality also restricts scientific research, making it difficult to validate therapeutic claims through traditional FDA pathways. Even state-licensed physicians risk professional consequences when recommending cannabis, as it remains a federally controlled substance. Patients who rely on medical cannabis may lose federal employment, housing or benefits. The federal stance remains the single most significant challenge for the industry’s long-term viability.

Individualised State Regulations

Each state with a medical cannabis programme has its own set of rules regarding licensing, product types, labelling, testing and qualifying conditions. This creates a fragmented regulatory landscape that complicates multi-state operations and compliance planning. A product approved in one state may be restricted or outright banned in another. Companies must build jurisdiction-specific strategies, often replicating vertically integrated operations in multiple states to remain compliant for each state in which they chose to operate.

For businesses operating in more than one state, this means maintaining parallel compliance systems, training procedures and legal frameworks. Some states require vertical integration, while others prohibit it. Licensing caps and residency requirements further restrict scalability and uniformity. Navigating this legal patchwork is both costly and time-consuming.

Banking and Financial Services Barriers

Owing to federal anti-money laundering laws, most banks and credit unions are reluctant to serve cannabis-related businesses. Even those operating exclusively in medical markets face difficulties opening accounts, securing loans or processing credit card payments. As a result, many dispensaries and operators rely on cash transactions, which increase the risk of theft and hinder financial transparency. Lack of banking access also makes it harder for businesses to raise capital and attract investors, further creating disparity between traditional and cannabis establishments.

Efforts to pass federal legislation, such as the SAFE Banking Act, have stalled repeatedly in Congress. Without change, cannabis businesses must continue navigating a financial environment defined by uncertainty and limited access. For accountants and legal advisers, ensuring compliance with state financial reporting requirements is complicated by the inability to use conventional financial tools. This also adds complexity to mergers, acquisitions and tax planning.

Section 280E and Tax Compliance

One of the most burdensome challenges for medical cannabis operators is Internal Revenue Code Section 280E. This provision prohibits businesses trafficking in Schedule I or II substances from deducting ordinary business expenses. As a result, even profitable businesses may face unsustainable federal tax bills. Only cost of goods sold (COGS) is deductible, which significantly narrows tax-planning options.

This constraint impacts profitability and discourages reinvestment into operations, staffing or research. Start-ups and smaller operators often struggle to remain viable under the weight of effective tax rates that can exceed 70%. Legal and accounting professionals must carefully structure entities and transactions to manage this tax exposure. Failure to comply accurately can result in audits, penalties or even criminal investigations.

Product Liability and Consumer Safety Risks

In the absence of federal oversight by the FDA or EPA, the burden of product safety falls on state regulators and private actors. Testing standards vary widely, and enforcement is inconsistent. This exposes patients to potential harm and businesses to liability claims for contamination, mislabelling or adverse effects. Companies may also face class actions over inaccurate potency labels or unsubstantiated health claims.

Medical cannabis is often used by vulnerable populations, including those with cancer, epilepsy or chronic pain. That makes the stakes higher and the margin for error lower. Operators must implement rigorous internal quality control systems that exceed state minimums.

Supply Chain and Logistics Challenges

Owing to federal prohibition, transporting cannabis across state lines remains illegal – even between legal markets. This limits economies of scale and forces companies to replicate infrastructure in each state where they operate. Cultivation, manufacturing and distribution must be entirely contained within state borders. The result is a fragmented supply chain that increases operational costs and reduces efficiency.

Weather, regional regulation and local zoning rules can all impact production capacity. Disruptions in one part of the supply chain often cannot be resolved by bringing in outside inventory. Some states also face oversupply issues, while others experience frequent shortages. Legal work involving logistics must anticipate these dynamics and incorporate contingency planning.

Intellectual Property Constraints

Cannabis companies face significant hurdles in protecting their intellectual property at the federal level. The United States Patent and Trademark Office (USPTO) does not issue trade marks for goods or services that violate federal law, including products containing THC. This presents challenges for cannabis companies attempting to register trade marks for some product types, and creates related vulnerabilities to infringement. Some companies attempt to secure trade marks for ancillary goods such as apparel or educational content, but enforcement is limited.

Patent protection is similarly fraught. While some patents related to cannabis compounds or methods have been issued, enforcement remains uncertain due to the underlying illegality of the product. Trade secrets and state trade marks offer partial solutions but fall short of comprehensive protection.

Labour and Employment Law Risks

As the medical cannabis industry expands, so do employment-related legal challenges. Many states require cannabis businesses to follow specific labour practices, including union neutrality agreements or diversity hiring plans. Federal labour protections may not extend to employees in federally illegal industries, raising complex questions about worker rights. Cannabis businesses also face high turnover, background check restrictions, and safety concerns related to handling controlled substances.

Employers must implement strong HR policies that comply with state labour laws while also navigating conflicting federal standards. Drug-free workplace policies are particularly tricky, especially in dual-licence operations employing both cannabis and non-cannabis workers. Wage and hour issues can also arise in states with strict overtime laws or cannabis-specific compliance burdens. Employment counsel should proactively audit policies and procedures to avoid litigation.

Insurance and Risk Management

Owing to the legal gray area surrounding cannabis, many insurers are unwilling to offer coverage – or offer it at prohibitively high rates. Gaps in coverage for general liability, product liability, property damage or cyber-risk can leave operators exposed. This places a heavy burden on companies to implement strong risk management practices internally.

Without reliable insurance, cannabis businesses must self-insure many operational risks. This can be a serious problem in the event of theft, fire or lawsuits.

Litigation and Enforcement Trends

The legal environment for medical cannabis is increasingly shaped by private litigation. Patients have filed lawsuits over mislabelled products, adverse reactions and fraudulent marketing. Shareholders have brought actions against cannabis companies for failing to meet public disclosure standards or for violating securities laws. Competitors have sued over trade secrets and unfair competition.

In parallel, enforcement actions at the state level are on the rise. Regulatory agencies are cracking down on licence violations, illegal advertising and improper financial reporting. Some states impose severe penalties, including licence suspension or revocation. Legal counsel must prepare clients for both regulatory scrutiny and private disputes.

Legal Risks for US Medical Cannabis Companies

Participants in the US medical cannabis industry face a unique set of legal risks that span federal criminal law, tax compliance, advertising, employment and liability exposure. These risks are magnified by the disconnect between state legality and federal prohibition, creating a legal gray area that requires constant attention. In this rapidly developing field, success depends not only on compliance but on anticipating where the law is headed next.

Federal Prohibition and Criminal Liability

Cannabis is classified as a Schedule I substance under the CSA, 21 USC Section 812. This designation makes it illegal to manufacture, distribute or possess cannabis, regardless of whether state law authorises it for medical use. Participants in state-legal programmes remain vulnerable to federal enforcement, though DOJ policy has deprioritised prosecution in cases of clear state compliance. However, enforcement priorities can change with shifting political leadership or revocation of appropriations riders such as the Rohrabacher-Farr Amendment.

Physicians recommending cannabis also walk a fine line. Although the First Amendment protects their right to discuss cannabis with patients, writing recommendations must be consistent with state law and medical board guidelines. Recommending cannabis in states without legal programmes could trigger federal or professional sanctions.

Banking Restrictions and Anti-Money Laundering Laws

Federal law prohibits banks from knowingly handling proceeds from cannabis-related transactions, labelling such funds as the proceeds of illegal activity. As a result, many financial institutions refuse to work with cannabis companies, even those operating solely within the medical space. Those that do participate must file Suspicious Activity Reports (SARs) and adhere to strict due diligence protocols under the Bank Secrecy Act. This creates significant burdens and legal exposure for both cannabis operators and their banking partners.

Businesses forced to operate in cash face increased risks of theft, tax evasion allegations, and accounting errors. Additionally, the lack of access to capital markets or traditional lending institutions stifles growth and scalability. Without legislative relief such as the stalled SAFE Banking Act, legal financial participation in the cannabis sector remains risky.

Section 280E Tax Limitations

Internal Revenue Code Section 280E prohibits businesses trafficking in Schedule I or II substances from deducting ordinary bushiness expenses. This applies to cannabis companies, including those operating legally under state medical cannabis laws. The result is a punitive federal tax regime where only cost of goods sold (COGS) may be deducted, leaving businesses with extraordinarily high effective tax rates. Even technically profitable operators may struggle with cash flow or insolvency due to tax burdens.

Legal structuring of entities to mitigate Section 280E exposure requires careful planning. Improper allocation of expenses or overly aggressive interpretations of COGS deductions can draw IRS scrutiny. Dispensary owners in particular face heightened audit risks and must maintain detailed records to survive tax challenges. Legal counsel should collaborate closely with tax professionals on compliance strategies.

Licensing and Regulatory Compliance

Each state maintains its own medical cannabis regulatory framework, often requiring licences for cultivation, manufacturing, distribution, dispensing and testing. These licences come with detailed compliance obligations, from security protocols to seed-to-sale tracking and waste disposal. Failure to comply can result in civil penalties, licence suspension or revocation. Moreover, many states impose strict deadlines, reporting requirements and inspection schedules.

The licensing process itself can also expose applicants to legal risks. False statements on applications or incomplete disclosures may lead to disqualification or enforcement action. Background checks often disqualify individuals with prior drug convictions – even where the offence involved cannabis now legal under state law.

Advertising and Marketing Restrictions

Medical cannabis advertising is tightly regulated and often limited to professional channels or physician-directed communications. Many states prohibit advertising that targets minors, uses health claims or implies broad therapeutic benefits. Violating these rules can lead to regulatory sanctions or consumer protection lawsuits. Federal law may also apply – especially where claims cross state lines or suggest FDA-approved benefits.

Additionally, platforms such as Google and Meta – which owns the Facebook and Instagram social media platforms – maintain their own policies prohibiting paid cannabis advertisements. This further complicates marketing strategies and forces companies to adopt cautious, compliance-driven messaging.

Physician Liability and Medical Board Oversight

Doctors recommending medical cannabis must operate within both state and professional guidelines. Most states require that physicians establish a bona fide doctor-patient relationship and assess the appropriateness of cannabis treatment. Some states specify qualifying conditions, while others give physicians more discretion. Failing to follow proper evaluation and documentation procedures could result in licence discipline.

Medical malpractice coverage may not cover cannabis-related care, especially where insurers consider it an “experimental” or federally illegal treatment. Additionally, physicians must be cautious not to prescribe (as opposed to recommend) cannabis, which would constitute a violation of the CSA. Legal counsel should ensure that physicians receive up-to-date guidance and maintain detailed patient records. A failure in compliance could jeopardise careers and patient access.

Employment and Labour Law Conflicts

Medical cannabis use may not be protectable in the workplace, particularly where federal law conflicts with state protections. Employees who are registered medical cannabis patients can still be terminated for positive drug tests under many employer policies. Although some states have adopted anti-discrimination laws, these protections vary widely. Courts have ruled inconsistently on whether employers must accommodate off-duty medical cannabis use.

This creates a precarious legal environment for both employers and employees. HR policies must be reviewed for consistency with applicable state laws and workplace safety regulations. Workers’ compensation, disability claims and unemployment eligibility may also be affected by cannabis use. Legal practitioners advising cannabis employers should implement state-compliant employment practices while managing federal exposure.

Interstate Commerce Prohibitions

Despite the legal status of cannabis in many states, transporting cannabis across state lines remains a federal crime. Even when both states have medical cannabis programmes, the CSA prohibits interstate transfer of any cannabis products. This limits economies of scale, increases supply chain fragmentation and poses risks for logistics providers. Businesses must maintain entirely intrastate operations in each jurisdiction where they are licensed.

Attempting to circumvent this prohibition can lead to significant penalties, including federal trafficking charges. Even third-party logistics companies may be liable if they knowingly transport cannabis across state borders. The lack of federal guidance makes this an area of high legal exposure.

Civil Litigation and Product Liability

Product liability lawsuits in the cannabis space are increasing. Plaintiffs have brought claims over contaminated products, inaccurate labelling and adverse reactions. In the medical context, such claims may involve vulnerable populations, such as cancer patients or children with epilepsy. The lack of federal safety standards heightens the risk of inconsistent testing or unregulated ingredients.

Moreover, class actions and consumer protection claims are likely to grow as the market matures. Businesses must implement robust quality assurance programmes and monitor supply chain partners. Insurance coverage may be limited or exclude cannabis-related claims altogether. Legal professionals should build strong risk management strategies, including recall plans and indemnification agreements.

Federal Enforcement: The DOJ and DEA

At the federal level, the DOJ – primarily through the DEA – retains full authority to investigate and prosecute cannabis-related activities under the CSA. Cannabis remains a Schedule I drug, meaning its cultivation, distribution and possession are considered federal crimes – even when conducted in compliance with state law. While enforcement has been deprioritised in medical cannabis cases that strictly follow state regulations, the legal risk is far from eliminated. Federal prosecution can result in severe penalties, including imprisonment, asset forfeiture and permanent business closure.

The DEA also has jurisdiction over research institutions and Schedule I registration. Those engaging in cannabis testing, development or clinical trials must obtain DEA registration and follow strict security protocols. Failure to comply with federal controls – even for medical use – can lead to licence revocation and criminal charges.

Federal Tax Enforcement

The IRS plays a significant enforcement role through tax compliance. Under Internal Revenue Code Section 280E, businesses that “traffic” in Schedule I or II substances cannot deduct ordinary business expenses. The IRS actively audits cannabis businesses to ensure compliance with 280E, often resulting in massive tax liabilities. Fines, penalties and interest can cripple otherwise profitable operators.

Cannabis businesses are also at risk for being flagged under anti-money laundering provisions when dealing in cash. Improperly structured financial transactions can prompt IRS investigations or referrals to the DOJ. Tax compliance in the cannabis industry is both high risk and high priority for enforcement authorities. Legal and accounting teams must work in tandem to mitigate exposure.

State Enforcement: Cannabis Control Boards and Health Departments

States generally assign cannabis enforcement to agencies within health or agriculture departments. These regulators oversee licensing, testing, advertising, packaging and retail compliance, with violations leading to fines, warnings or licence suspensions.

Enforcement varies by state – some use random inspections, while others rely on audits or complaints. Agencies may issue cease-and-desist orders, subpoena records and escalate serious violations to criminal cases.

Local Enforcement: Municipal Oversight and Zoning Authorities

Local governments frequently impose their own layer of oversight through time, place and manner restrictions via zoning laws, business permits and public nuisance ordinances. Many municipalities have opted out of state programmes or capped the number of dispensaries allowed.

In cannabis-friendly cities, businesses must adhere to strict location-based rules, including buffer zones around schools or churches. Generally, zoning ordinances create “green” zones, or specific parts of municipalities where regulators have designated spaces for operations to occur, which in effect creates over-saturation concerns for operators. Violating local zoning or permitting laws can lead to shutdown orders, permit revocation or costly litigation.

City and county law enforcement agencies may also conduct inspections or collaborate with state regulators. Fire departments, building inspectors and environmental health officers may participate in compliance checks. Local governments wield significant influence and often act more swiftly than state or federal entities. For operators, local compliance is just as critical as state licensure.

Civil and Consumer Enforcement: Attorneys General and Class Actions

State attorneys general may bring civil enforcement actions against cannabis companies for unfair business practices, deceptive marketing or violations of consumer protection statutes. These actions can result in consent decrees, injunctions and monetary penalties. In the medical cannabis space, claims related to mislabelled potency, contamination or unsubstantiated health benefits are increasingly common. Public health concerns can quickly escalate into legal liability.

In addition to government actions, plaintiffs’ attorneys have begun filing class action lawsuits against cannabis operators. Common claims include false advertising, failure to disclose contaminants, and violations of consumer protection laws. Settlements or judgments in such cases can reach millions of dollars. Legal exposure is amplified when products are marketed to vulnerable populations such as medical patients.

Product Recalls and Administrative Enforcement

State regulators often have the authority to mandate product recalls for safety violations, such as failed lab tests, pesticide contamination or mould. Recalls may be voluntary or ordered by the agency, and typically require public notification, destruction of products and corrective action plans. Failing to execute a recall properly can trigger further penalties or endanger licensure. Regulators may also publicise infractions, damaging a brand’s reputation. For example, the Michigan Cannabis Regulatory Agency provides public information about recent enforcement actions and violations.

Administrative enforcement can also extend to operational areas such as data reporting failures, inadequate surveillance systems or violations of operating procedures. These seemingly minor violations can quickly accumulate and result in loss of licensure. In states with limited licence availability, a revoked licence may not be replaceable. Operators must maintain detailed compliance documentation and audit their operations regularly.

Labour and Employment Enforcement

Labour departments at the state and federal levels monitor cannabis businesses for compliance with wage and hour laws, worker safety standards and anti-discrimination statutes. Cannabis employers are subject to the same employment laws as other industries, including the Fair Labor Standards Act (FLSA) and Occupational Safety and Health Act (OSHA). Violations can result in back-pay orders, civil penalties or criminal liability for wilful misconduct. Some states require cannabis-specific labour agreements or union neutrality clauses as a condition of licensure.

Employment-related enforcement has increased as the industry matures. Claims of wrongful termination, failure to accommodate disabilities, or unsafe work environments are on the rise. Cannabis employers must maintain detailed HR policies and ensure proper classification of workers. Labour audits and lawsuits are a growing risk area for the industry.

Environmental and Agricultural Enforcement

In cultivation-heavy states, environmental and agricultural agencies regulate water use, pesticide application and waste disposal. Cannabis growers – often unaware that typical agricultural exemptions do not apply – frequently face unexpected enforcement. Violations can lead to fines, clean-up orders or even criminal charges for serious contamination.

States such as California and Oregon have aggressively pursued illegal water diversion, improper chemical use and unpermitted land clearing. Cultivators must follow best practices not just for cannabis laws but for environmental stewardship. Penalties in this area can involve multiple agencies and substantial fines.

Consequences of Non-Compliance

The penalties for non-compliance in the medical cannabis industry are severe and often overlapping. Administrative sanctions can include fines, licence suspension and revocation. Civil penalties may involve damages, disgorgement of profits, or injunctions. Criminal prosecution can lead to prison sentences, asset forfeiture, and permanent loss of eligibility to participate in the industry.

The US medical cannabis industry operates within a uniquely fragmented legal framework. With no unified federal regulatory structure and laws varying from state to state, cannabis businesses must navigate a patchwork of conflicting rules, obligations and enforcement priorities. These cross-jurisdictional issues affect all aspects of operations and intellectual property protection.

Federal Versus State Law Conflicts

At the heart of cross-jurisdictional tension lies the fundamental conflict between federal and state law. Cannabis remains illegal, while 38 states and several US territories have legalised medical cannabis through their own regulatory regimes. This dual system forces businesses to comply with state law while simultaneously violating federal law.

Federal agencies such as the DEA and IRS retain enforcement authority, and federal laws affect banking, taxation and intellectual property rights. Even when states provide comprehensive regulatory frameworks, federal restrictions complicate operations across jurisdictional lines. Compliance in one state does not guarantee protection from federal penalties or limitations.

Variations in State Licensing Requirements

Each state has its own medical cannabis licensing system, with different requirements for cultivation, processing, distribution and dispensing. Multi-state operators have to apply for licensure separately in each jurisdiction and adapt to different regulatory schemes. Various states mandate vertical integration; others prohibit it. Application procedures, fee structures, residency requirements and background checks all vary significantly.

Transportation and Interstate Commerce Restrictions

As cannabis remains federally illegal, it cannot legally cross state lines, even between states with legal medical cannabis programmes. This ban on interstate commerce creates inefficiencies and forces businesses to duplicate infrastructure in every state in which they operate. It also prevents states from importing medical cannabis when supply shortages occur. The risk leads to the under-serving of medical patients.

Legal risks include potential federal trafficking charges for any cross-border movement of cannabis, including seeds, clones or finished products. Even indirect movement through third-party logistics providers can trigger liability. Some operators have mistakenly assumed that operating only in medical markets offers protection, but federal law makes no such distinction. Cross-border transactions remain a high-risk area regardless of state authorisation.

Inconsistent Product Testing and Safety Standards

States impose their own lab testing standards for medical cannabis, but these requirements vary widely in scope, methodology and enforcement. A product deemed compliant in one state might fail testing in another due to differences in pesticide thresholds, labelling requirements or microbial contamination standards.

This variability also complicates supply chain management. Companies cannot centralise product testing across jurisdictions, which increases costs and operational burdens. Legal counsel must help clients develop state-specific protocols for quality assurance and regulatory reporting. Failure to comply with a single state’s standards can trigger recalls, licence suspensions or consumer litigation.

Taxation

As discussed previously (see 1.4 Challenges for Market Participants), Section 280E prohibits businesses trafficking in Schedule I or II substances from deducting ordinary business expenses. This federal tax rule applies to all cannabis businesses, regardless of whether they operate solely in medical markets or comply with state law.

Meanwhile, state tax treatment varies: some states conform to federal tax law, while others decouple from it and allow full deductions. This mismatch creates a complex and often contradictory tax environment. Multi-state cannabis businesses must navigate different tax obligations in each jurisdiction. Local jurisdictions also collect taxes, either on gross receipts or by facility size.

Tax reporting becomes a burdensome and risky process that requires careful planning and documentation. A mistake in one state can lead to audits or penalties across the company’s entire footprint.

Employment Law Conflicts

Cross-jurisdictional employment issues complicate medical cannabis policy. Some states protect registered patients, while others permit termination for off-duty use, and federal law offers no protection. Industries such as transportation and federal contracting maintain strict zero-tolerance rules. Multi-state employers must navigate conflicting standards. HR policies must be tailored by jurisdiction, particularly for drug testing, disability accommodations and safety compliance. Uniform policies are often impractical across states.

Intellectual Property Limitations

Federal intellectual property protection presents another cross-jurisdictional barrier. The USPTO does not grant trade mark protection for cannabis products that violate federal law. While some companies register trade marks for ancillary products or services, these marks offer limited protection. State-level trade marks are available but lack enforceability outside state borders.

This creates a fractured system for protecting cannabis brands, formulas and technologies. A business operating in multiple states may face infringement with little legal recourse. Licensing agreements must account for differing state intellectual property laws and enforcement mechanisms.

Patient Rights and Access Across States

Registered medical cannabis patients face legal uncertainty when travelling between states. Patient identification cards issued by one state may not be recognised in another, even where both have medical programmes. Some states offer reciprocity; others explicitly deny out-of-state patient access. This creates confusion and risk for patients seeking consistent treatment across jurisdictions.

Patients may unwittingly violate state law by possessing medical cannabis legally obtained elsewhere. In certain cases, law enforcement has arrested patients despite clear evidence of medical use. Physicians and patient advocates must educate individuals on the legal risks of interstate travel with cannabis. Federal prohibition exacerbates this problem by barring any legal transport across state lines.

Legal Barriers to Medical Cannabis in the United States

While 38 states and several territories have legalised its medical use, cannabis remains federally illegal. The following lists the legal elements affecting access to medical cannabis in the USA.

Federal barriers to research and development

Federal cannabis prohibition restricts research, requiring DEA approval for studies and limiting state programme development due to insufficient clinical data.

State variability in qualifying conditions

Qualifying conditions for medical cannabis vary widely by state, resulting in inconsistent patient eligibility and access across jurisdictions.

Physician participation and liability

Many physicians decline to recommend cannabis due to legal uncertainty, professional risk and lack of regulatory clarity, contributing to provider shortages.

Patient registration and ID requirements

State medical cannabis registration processes – often costly and time-consuming – pose significant access barriers, particularly for low-income or disabled patients.

Geographic disparities in dispensary access

Patients in rural or opt-out municipalities face limited or no access to dispensaries due to local bans and uneven geographic distribution, creating medical cannabis “deserts” in some areas of the USA.

Cost and insurance coverage issues

With no insurance coverage under Medicare, Medicaid or most private plans, the out-of-pocket cost of medical cannabis remains a major access barrier.

Caregiver access and restrictions

Strict caregiver rules – such as registration limits and background checks – impede access for patients needing daily or assisted cannabis use.

Travel and reciprocity challenges

Lack of state reciprocity and the federal ban on interstate cannabis transport leave patients legally vulnerable when travelling with medical cannabis.

Likelihood of Change

The likelihood of federal legalisation of medical cannabis in the near-term remains low due to the tumultuous US political landscape. Easing of federal illegality would significantly improve the aforementioned issues on barriers to access. In 2023, the Department of Health and Human Services (HHS) recommended rescheduling cannabis to Schedule III. The rescheduling discussion is currently paused.

Proponents believe the rescheduling would better reflect medical cannabis’ medical value, remove key barriers to research, and ease financial strain on state-legal cannabis businesses by eliminating Section 280E. Supporters also emphasise improved patient access and the potential for consistent regulatory standards. Furthermore, they assert that state control over legalisation would remain unaffected.

Owing to the federal government’s reluctance to create uniform laws on medical cannabis, the patchwork of rules would be significantly impacted by a blanket legalisation.

Opponents argue that Schedule III would not resolve the broader federal-state legal conflict or eliminate penalties for non-medical use. Critics – including pharmaceutical and law enforcement groups – warn of unverified medical claims and regulatory complications. Many believe that rescheduling falls short of meaningful reform, especially with federal prohibition still in place.

Are Non-Controlled Cannabinoids Permitted in Food Products in the USA?

The legal status of non-controlled cannabinoids in food products – especially CBD – remains unsettled under US federal law. While the 2018 Farm Bill legalised hemp and its derivatives – including cannabinoids containing less than 0.3% delta-9 THC – it did not give blanket approval for the use of cannabinoids in food or dietary supplements. The FDA retains authority over food safety and labelling, and it has taken a cautious stance on the use of CBD in ingestible products. As of 2024, adding cannabinoids to food or beverages is not permitted at the federal level without explicit FDA approval.

Under the Federal Food, Drug, and Cosmetic Act (FDCA), any substance that is intended to diagnose, cure, mitigate, treat or prevent disease must be approved as a drug before it can be marketed as such. CBD has already been approved as an active pharmaceutical ingredient in Epidiolex, a prescription medication for rare seizure disorders. As CBD was studied and approved as a drug before it was marketed in foods, the FDA considers it ineligible for use as a dietary ingredient in food or supplements. The so-called “drug exclusion rule” under the FDCA applies, blocking companies from using CBD in consumable products without FDA authorisation.

Despite the FDA’s position, many products containing non-controlled cannabinoids are already available in interstate commerce. These include CBD-infused beverages, baked goods, gummies and supplements. The FDA has issued warning letters to companies making unsubstantiated health claims or marketing ingestible CBD products. Enforcement has been selective but the legal risk remains.

The FDA has publicly acknowledged the regulatory gap, and in early 2023 it stated that a new regulatory pathway is needed to address the unique safety and dosage concerns associated with cannabinoids. The agency has requested that Congress establish a legal framework to allow certain cannabinoids in dietary supplements or conventional foods, subject to specific safeguards. Until such legislation is enacted, no formal approval process exists for these products. Companies that proceed with cannabinoid-infused foods are operating in a legal grey area, relying on limited enforcement and state-level policies.

Some states have stepped into the void by allowing the sale of hemp-derived cannabinoid foods under their own regulatory schemes. States such as Colorado and Oregon permit certain cannabinoid-infused food products, provided they meet state testing, labelling and manufacturing standards. Other states, however, have banned such products outright or impose severe restrictions. This state-by-state inconsistency adds to compliance burdens for manufacturers and distributors.

Current Movements to Decriminalise and Regulate Recreational Cannabis in the USA

The recreational cannabis landscape is ever-evolving, with 24 states and Washington, DC having legalised adult-use cannabis. This shift reflects growing public support and economic interest in cannabis reform. However, efforts to decriminalise or regulate cannabis at both state and federal levels face a complex array of legislative, political and legal challenges.

At the federal level, cannabis remains classified as a Schedule I substance under the CSA, posing significant hurdles for state-legal cannabis businesses. Recent legislative efforts, such as the reintroduction of the PREPARE Act, aim to establish a federal regulatory framework for cannabis, including provisions for interstate commerce and the removal of cannabis from the controlled substances schedules. Additionally, the SAFER Banking Act seeks to provide cannabis businesses with access to financial services by protecting federally regulated financial institutions that serve state-sanctioned cannabis businesses.

Public support for cannabis reform remains strong. According to the Drug Policy Alliance, as of March 2025, 88% of Americans support legalising marijuana for medical or recreational use. This widespread support continues to drive legislative efforts and ballot initiatives across the country, signalling a persistent momentum towards broader cannabis legalisation and regulation.