Nebraska, Indiana, and Louisiana have taken direct legal aim at the Trump administration's rapid reclassification of medical cannabis, filing a formal petition for review in the U.S. Court of Appeals for the D.C. Circuit on May 22. The petition names Acting Attorney General Todd Blanche and DEA Administrator Terrance Cole as respondents and argues that the April rescheduling action - which moved state-licensed medical cannabis and certain FDA-approved products to Schedule III of the Controlled Substances Act - was procedurally improper and legally unsound. For licensed cannabis operators and the businesses that serve them, this fight isn't abstract: the regulatory footing beneath the entire medical cannabis supply chain is now actively contested in federal court.
What the States Are Actually Arguing
The three states' attorneys general - Todd Rokita of Indiana, Mike Hilgers of Nebraska, and Liz Murrill of Louisiana - are challenging two discrete federal actions. The first is Acting AG Blanche's April 22 signed order. The second is the DEA's subsequent "final rule" published April 28 in the Federal Register. Their 15-page petition asserts both actions violated the Administrative Procedure Act (APA) - the federal framework that governs how agencies must conduct rulemaking, including public notice periods and comment processes.
The petition's language is pointed. It alleges the rescheduling was "improperly promulgated," exceeded authority under the Controlled Substances Act, and conflicts with the U.S.'s obligations under the Single Convention on Narcotic Drugs - the same international treaty Blanche cited as the legal justification for bypassing the traditional APA rulemaking process in the first place. That's a notable tension: both sides are invoking the treaty, but reaching opposite conclusions about what it requires.
What's striking here is that Indiana and Louisiana are medical-only cannabis states, while Nebraska maintains full prohibition. These aren't operators complaining about federal interference with a commercial market they're invested in - they're states that have either restricted or rejected adult-use cannabis arguing that even a liberalizing federal action can be procedurally invalid. That position may feel counterintuitive, but it reflects a consistent APA-based principle: the process matters regardless of the policy outcome.
The Treaty Pathway and Why It Matters
Blanche's April order used a specific legal mechanism - Section 811(d)(1) of the CSA - that allows the attorney general to reschedule a substance to fulfill U.S. obligations under international drug treaties. That's a narrower authority than the standard rescheduling process, which requires an HHS medical and scientific evaluation, a DEA administrative review, and a formal rulemaking period open to public comment.
The Biden-era HHS evaluation - completed in August 2023 - had already determined that cannabis has "currently accepted medical use" in the U.S. and that its abuse potential is lower than Schedule I and II substances. Blanche acknowledged that finding in his order. He didn't rely on it as the primary basis for acting, though. Instead, he used the treaty pathway to move faster, placing state-licensed medical cannabis and FDA-approved cannabis-derived products in Schedule III essentially by executive order - while routing adult-use cannabis through the slower, traditional APA process, including an administrative law judge hearing set for June 29.
The DOJ's Office of Legal Counsel had issued a 2024 opinion supporting this approach, concluding that Schedule III controls are sufficient to satisfy U.S. obligations under both the Single Convention and the Convention on Psychotropic Substances. Nebraska, Indiana, and Louisiana - along with the prohibitionist group Smart Approaches to Marijuana (SAM) and the National Drug and Alcohol Screening Association (NDASA), which filed a parallel petition on May 4 - will likely argue in their upcoming briefs that the OLC opinion is flawed and that the treaty pathway was improperly applied.
On May 27, the D.C. Circuit consolidated both challenges. SAM and NDASA face a June 4 deadline to file their brief; the three states have until June 26.
What Licensed Operators and Industry Partners Should Watch
For dispensary operators, multi-state operators (MSOs), wholesalers, and the ancillary businesses - payments processors, seed-to-sale software vendors, compliance consultants - that have been watching federal rescheduling as a potential turning point, this litigation introduces real uncertainty into an already complicated picture.
Schedule III status, if it holds, would not legalize cannabis federally. State licensing, excise tax structures, compliance obligations, and age-verification requirements would remain fully intact at the state level. But rescheduling would remove cannabis from Schedule I, which has implications for tax treatment - specifically, the 280E provisions of the Internal Revenue Code that currently prohibit cannabis businesses from deducting ordinary business expenses. Schedule III status would likely end 280E's application to cannabis businesses, a significant change to dispensary economics.
If the D.C. Circuit sides with the challengers and vacates the rescheduling rule, that tax relief evaporates before it ever materializes. Operators who have begun planning around a post-280E cost structure - adjusting cash flow projections, renegotiating wholesale pricing, or modeling expansion - would need to recalibrate. The same applies to payment processors and banking partners who have been cautiously re-evaluating cannabis account policies in anticipation of Schedule III taking effect.
There's also a compliance documentation angle worth noting. State-licensed operators in medical markets affected by the rescheduling order - if the rule survives - may face updated federal reporting or record-keeping obligations tied to Schedule III controls. That kind of regulatory layering, federal requirements on top of existing state-level seed-to-sale tracking and METRC obligations, is exactly the kind of operational complexity that compliance officers and POS system vendors need to be monitoring closely.
The short version: the rescheduling rule is in force right now, but it is being actively litigated. No licensed cannabis business should treat Schedule III as settled law until the courts rule - and that ruling may not come quickly.
