Last month, Nathalie Bougenies and I put on a webinar on the US Department of Agriculture’s (“USDA”) new interim hemp rules. We got some great questions from our viewers but were unable to answer all of them in real-time. In this two-part series, Nathalie and I will respond to a number of those questions. This first part will focus on licensing and transportation questions. In tomorrow’s post, Nathalie will respond to questions relating to THC testing.

LICENSING

If a state, like Tennessee, operates under the 2014 Farm Bill, but the state applies for a USDA state plan and that is approved, does that then void the 2014 pilot rules and regulations for existing farms in Tennessee operating under 2014 Farm Bill?

Each state is handling the transition from the 2014 Farm Bill to the 2018 Farm Bill a little differently so if you are a hemp producer operating under a 2014 Farm Bill program, you’ll need to check with your state’s department of agriculture. Also, the 2018 Farm Bill extended the 2014 Farm Bill for one year after the USDA published its interim rules on hemp (October 31, 2020) meaning that states who submit 2018 Farm Bill plans can continue to regulate under the 2014 Farm Bill. It’s also likely that most states will implement procedures to allow current licensed producers to transition to the 2018 Farm Bill.

Because this question addresses Tennessee specifically, the following passage from the Tennessee Department of Agriculture is helpful:

The U.S. Department of Agriculture (USDA) has released a draft of the rule outlining federal provisions for the domestic production of hemp. A preview of the rule is posted on USDA’s website, along with answers to frequently asked questions.

Leaders at the Tennessee Department of Agriculture (TDA) are reviewing this draft to determine potential impact on Tennessee’s hemp program.

No immediate changes are expected. Licensed hemp growers in Tennessee will continue to operate under current state regulations at this time.

As of Nov. 1, we have 3,800 producers licensed to grow as much as 51,000 acres of hemp statewide.

TDA looks forward to continue working with farmers and industry partners to support the production of hemp in Tennessee.

Since USDA has not regulated processing, is an entity that grows not allowed to process? Must a separate entity be formed?

Nothing in the 2018 Farm Bill or the USDA’s interim hemp rules explicitly allow or prohibit a hemp producer from processing hemp. The USDA doesn’t really touch on processing at all. Some states issue licenses to process hemp and may continue to do so under the 2018 Farm Bill. State law must be analyzed to determine what is required for processing.

TRANSPORTATION

Can you legally transport extracted Hemp CBD across state lines lab tested which shows less than 0.3% THC?

The 2018 Farm Bill prevents a state from interfering with the transport of hemp that was legally cultivated. Hemp is defined under federal law to encompass hemp derivatives, which includes Hemp-CBD. Strictly speaking, you can legally transport Hemp-CBD across state lines. However, states are free to prohibit the sale or distribution of Hemp-CBD within their borders.

The tides have been rapidly changing for hemp companies to gain access to banking, which has not traditionally been available to hemp companies due to the fact that hemp was (sort of) federally illegal until about a year ago. As we previously explained:

Commercial marijuana activity remains a federal crime, and the Bank Secrecy Act (“BSA”) generally prohibits financial institutions from accepting marijuana-generated dollars. Financial institutions that work with marijuana businesses must conduct due diligence to ensure that marijuana businesses are complying with state law. That includes regularly submitting Suspicious Activity Reports (“SARs”) to the Financial Crimes Enforcement Network (“FinCEN”). Regulated commercial hemp activity is not a federal crime, but hemp’s close proximity to marijuana makes it a generally high-risk endeavor for financial institutions who generally don’t have a high risk tolerance to begin with. That has made it very difficult for many hemp and hemp-derived CBD (“Hemp-CBD”) businesses to access bank accounts.

Since the 2018 Farm Bill was signed and hemp was removed from the Controlled Substances Act, our hemp attorneys have seen more and more banks and credit unions take on various kinds of hemp clients (including hemp cultivators, processors, and even Hemp-CBD sellers). But still, many financial institutions have been hestitant when it comes to servicing hemp clients. As of the last few months, that has been changing.

As we reported over the summer, in August, the National Credit Union Administration (“NCUA”) released Interim Guidance on Serving Hemp Businesses. This guidance, though short, is fairly robust and provides ways for credit unions to verify that hemp clients are engaged in lawful business.

This week, on December 3, 2019, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Financial Crimes Enforcement Network (“FinCEN”), and the Office of the Comptroller of the Currency in consultation with the Conference of State Bank Supervisors released joint guidance entitled, “Providing Financial Services to Customers Engaged in Hemp-Related Businesses”. The guidance was intended to “provide clarity regarding the legal status of commercial growth and production of hemp and relevant requirements for banks under the Bank Secrecy Act (BSA) and its implementing regulations.”

There are a few key points from the joint guidance:

1. The quoted language (and other language in the joint guidance) refers just to commercial growth and production of hemp and even notes that the FDA retains jurisdiction over foods, drugs, and cosmetics. The 2018 Farm Bill only regulates hemp production, and does not really discuss hemp processing or the sale of Hemp-CBD goods. It’s not totally clear from the text of the joint guidance whether it was intended to cover only cultivation, and it certainly can be read that way. Therefore, it’s not yet clear whether banks will service clients engaged in those activities.
2. The joint guidance makes clear that banks won’t need to file SARs for clients based solely on the fact that they are engaged in cultivation of hemp. Banks will still need to follow standard SAR procedures and file SARs if there are indicia of suspicious activities.
3. The joint guidance makes clear that banks have discretion about what services to offer, but that bank clients must comply with applicable law. This puts the onus on banks to vet their customers to ensure compliance with hemp laws and regulations. Some things that the joint guidance expressly requires banks to do are to have BSA and anti-money laundering (“AML”) compliance programs commensurate with the level of complexity and
   risks involved, comply with applicable regulatory requirements for customer identification, SARs, currency transaction reporting, and risk-based customer due diligence (including collecting beneficial ownership information for legal entity customers).
4. Though the joint guidance does cover marijuana businesses, it makes clear that banks servicing those businesses should follow the FinCEN guidance FIN-2014-G001 – BSA Expectations Regarding Marijuana-Related Businesses.

The joint guidance also states that additional FinCen guidance will be released in the future. Hopefully by then, banks will have more comprehensive guidance for servicing hemp clients. But for now, this joint guidance is certainly a step in the right direction.

The hemp industry is up in arms over the USDA’s interim rules establishing a domestic hemp program. As of this writing you can find some 900 comments published on regulations.gov. The din of complaints about the deleterious effect of several rules caused Senator Chuck Shumer to send a letter on December 3 to U.S. Agriculture Secretary Sonny Purdue urging the Secretary to extend the public commend period by 60 days. Presently, the public comment period ends on December 30, 2019 and it is unclear whether the comment period will be extended.

Most of us in the hemp industry are well-aware of the major issues in the interim rules: 15-day pre-harvest testing requirements, total THC, DEA laboratories, and crop insurance to name a few. This post is to urge everyone working in hemp to comment on how the interim hemp rules will affect the hemp industry and how the rules ought to be amended.

Crop Insurance: No coverage for hemp crops above .3% Total THC

A major achievement of the 2018 Farm Bill was that it cleared the way for the Federal Crop Insurance Corporation to offer policies to hemp farmers. Producers can obtain coverage under the Whole-Farm Revenue Protection (WFRP) program for 2020 if they are now part of a Section 7606 state or university pilot program authorized by the 2014 Farm Bill or once a USDA-approved plan is in place. WFRP allows coverage of all revenue for commodities produced on a farm up to a total insured revenue of $8.5 million. WFRP coverage is often used for specialty and non-traditional crops.

However, hemp with a THC level above the compliance level will not constitute an insurance cause of loss and hemp will not qualify for replant payments under the WFRP. And the interim rules include fairly strict provisions requiring the destruction of hemp that contains more that .3% Total THC.

But THC levels can fluctuate because of numerous factors beyond the control of any farmer. The USDA recognized this when it decided against a seed certification program in the interim rules because “the same seed used in one State to produce hemp plants with THC concentrations less than 0.3%, can produce hemp plants with THC concentrations of more than 0.3% when planted in a different State.” THC levels can also fluctuate because of weather and other factors and often vary throughout the preharvest life of a hemp plant.

Here is what one farmer from North Carolina had to say:

The genetics of current hemp crops are such that THC levels vary by cultivar, growing condition, etc. They are not always consistent across regions or seasons, even with the best planning, care, and genetic selection. This rule should NOT require farmers to destroy their crops if above .3% THC. In this industry, farmers are at greatest risk of losing their shirts financially, especially if you destroy their entire crop. The regulation should instead allow the farmer to process the crop through extraction, distillation, and isolation, the output of which are cannabinoids separated out in individual containers (CBD, CBG, THC, etc).

The lack of crop insurance coverage for hemp that fails testing when combined with the rules about crop destruction, creates enormous risk for hemp farmers. A farmer may try to do everything right only to end up with an uninsurable crop that must be destroyed and a complete loss of their investment into hemp farming. And, as the farmer from North Carolina notes, the interim rules do not provide for post-harvest remediation of hemp with total THC levels greater than .3%.

Total THC: Delta-9 + THCA

Nathalie Bougenies has written on this topic extensively, so I will just give you an excerpt and a few links:

To the disappointment of many in the hemp industry, the USDA adopted a total THC testing requirement. As we previously explained, total THC is the molar sum of delta-9 THC (“THC”) and delta-9 tetrahydrocannabinolic acid (“THCA”). Using a total THC testing protocol will create additional hurdles for hemp farmers who are already engaged in a precarious industry. Not only does this testing method tend to increase the THC concentration in the hemp sample, and thus, pushes it over the 0.3 percent limit, it also limits the type of strains farmers can work with. This is because few hemp genetics currently on the market would comply with a total THC testing method. Consequently, this rule will force hemp farmers to carefully select the types of seeds they buy.

Most everyone agrees that the Total THC requirement is terrible. Here is what one small family farmer commented to the USDA:

To require a 0.3 percent TOTAL THC limit would devastate the CBD and flower industry. Moving forward into 2020 many crops would have to be destroyed that have otherwise been able to be used for extraction for the last several years. Most farmers do not understand what this TOTAL THC methodology means for them.

For more background on this issue, see here, here, and here. For a detailed scientific analysis, Rod Kight recently posted a modified version of a comment written by Marion Snyder, PhD, Chief Scientific Officer of Clearwater Biotech. Dr. Snyder’s findings should alarm everyone in the hemp industry.

15-day preharvest testing by a DEA registered laboratory

The USDA rules require that hemp be sampled and tested for total THC within 15 days of anticipated harvest. And the rules further require that the testing labs be registered with the Drug and Enforcement Administration (DEA). But current DEA rules limit registration to jurisdictions in which medical or recreational marijuana is legal. Although the number of such jurisdictions is growing, no one in the industry believes that the number of DEA registered laboratories can handle the quantities of hemp being produced by American farmers. This is an area where Congress may need to place pressure on the USDA and DEA to avoid causing a significant bottleneck in the hemp supply chain.

Your Comments Matter

Everyone in the hemp industry should take a few minutes to submit a comment on the interim rules. Because the USDA was directed to devise and implement new rules without delay, the USDA did not follow the ordinary “notice and comment” process with which federal agencies generally must comply in the rulemaking process. The USDA’s decision not to follow this process is explained thoroughly in the interim rules themselves and was reviewed by the U.S. Government Accountability Office (GAO). You can read the GAOs report on that here. I am not saying the USDA did anything wrong in foregoing a two-year notice and comment period given the need to move swiftly to establish a hemp production program. But the rush to issue rules does mean that comments submitted on the interim rules matter as the USDA works toward issuing final rules.

In sum: Everyone in the hemp industry ought to submit a comment. Submitting a comment is easy: just click here. Note that you can also upload documents, such as prepared statements or other relevant materials. If you’d like assistance with crafting a comment, please reach out to one of our Hemp-CBD regulatory attorneys.

The Agriculture Improvement Act of 2018 (“2018 Farm Bill”) legalized hemp by removing the crop and its derivatives from the definition of marijuana under the Controlled Substances Act (“CSA”) and by providing a detailed framework for the cultivation of hemp. The 2018 Farm Bill gives the US Department of Agriculture (“USDA”) regulatory authority over hemp cultivation at the federal level. In turn, states have the option to maintain primary regulatory authority over the crop cultivated within their borders by submitting a plan to the USDA.

This federal and state interplay has resulted in many legislative and regulatory changes at the state level. Indeed, most states have introduced (and adopted) bills that would authorize the commercial production of hemp within their borders. A smaller but growing number of states also regulate the sale of products derived from hemp.

In light of these legislative changes, we are presenting a 50-state series analyzing how each jurisdiction treats hemp-derived cannabidiol (“Hemp CBD”). Each Sunday, we summarize a new state in alphabetical order. Today we turn to Mississippi.

Mississippi is one of the few states that did not allow hemp cultivation under the 2014 Farm Bill. As of this writing, Mississippi still doesn’t allow for hemp cultivation. But don’t fret, there is a task force!

Last year, Mississippi enacted House Bill 1547 which established the Mississippi Hemp Cultivation Task Force. The Task Force will study hemp cultivation, market potential, and job creation. The Mississippi Department of Agriculture has more information on the task force here.

Because Mississippi law doesn’t distinguish between marijuana and hemp, the sale of hemp-based products, including Hemp-CBD, is risky at best and illegal at worst. Mississippi has a very limited medical marijuana program, which allows the limited sale of CBD products. Most over-the-counter Hemp-CBD sales would not fall within the boundaries of this program. In addition, the Mississippi Department of Public Health and Safety recently issued a statement warning the public about the dangers of Hemp-CBD.

Mississippi’s hemp program is really non-existent at this point. Mississippi hasn’t exhibited a strong aversion to hemp like some other states (looking at you Idaho) but it also is in a small minority of states with no hemp cultivation regulations. This may change in light of the 2018 Farm Bill, but as it currently stands, Mississippi is not a great place for hemp-related activities.

For previous coverage in this series, check out the links below:

• Alabama
• Alaska
• Arizona
• Arkansas
• California
• Colorado
• Connecticut
• Delaware
• Florida
• Georgia
• Hawaii
• Idaho
• Illinois
• Indiana
• Iowa
• Kansas
• Kentucky
• Louisiana
• Maine
• Maryland
• Massachusetts
• Michigan
• Minnesota

Dozens of times per month, I am asked by clients and potential clients whether hemp-derived cannabidiol (“Hemp CBD”) products are legal in California. With almost any other product, I can give an easy “yes” or “no” answer. But with Hemp CBD, my answer usually takes five to ten minutes to explain and ultimately ends with “there is no clear answer, all of this could change dramatically in the next few months, and all of this will change in the next year”. Given the perplexing state of Hemp CBD laws in this state, I thought it might help to try to answer this all-too-common question here as well.

To really understand the legal status of Hemp CBD in California, one should understand the state’s stance on “cannabis”. The term “cannabis” is a legally defined term that means the Cannabis sativa L. plant with more than .3% delta-9 THC and excludes hemp, which is legally defined as the Cannabis sativa L. plant with .3% or less delta-9 THC. Cannabidiol can be derived from either cannabis (in which case it is generally legal and may be sold through the licensed cannabis chain), or hemp (in which case the law is completely unclear in many cases). If this all seems a bit confusing, it is. I won’t even try to get into the different terminology that the federal government uses.

The state cannabis agencies, ironically, prohibit licensed commercial cannabis businesses from using Hemp CBD in manufactured cannabis products or selling Hemp CBD products in licensed cannabis retail stores. Beyond that, the state has not adopted a single law that expressly outlaws Hemp CBD processing, sale, or consumption (though some cities or counties in the state may actually have laws prohibiting such activities). Instead, about a year and a half ago, the California Department of Public Health’s Food and Drug Branch (“CDPH”) released an FAQ document which stated that in spite of the fact that cannabis derivatives may be lawfully added to edibles, Hemp CBD could not legally be added to foods (including beverages and animal foods) or dietary supplements. The FAQ says nothing about many other products, such as cosmetics, smokeable hemp, or Hemp CBD vapes.

These FAQs, notably, are based expressly on federal law, and do not explicitly cite California law to support CDPH’s attempted ban on Hemp CBD foods. There are really two main arguments in the FAQs for why Hemp CBD foods are unlawful:

1. Hemp was a Schedule I (illegal) drug under the Controlled Substances Act. This argument is no longer valid, since the Controlled Substances Act (“CSA”) was amended by the 2018 Farm Bill to carve hemp out from the CSA. But either way, it is a bit odd that the CDPH was attempting to ban a substance based on its placement in the CSA, when the CDPH is also responsible for licensing cannabis manufacturers, where cannabis is a Schedule I narcotic.
2. The FDA did not allow Hemp CBD to be added to foods. This is still the case, as the FDA recently made clear. But again, it is interesting that the CDPH is relying on a federal agency’s position when it comes to Hemp CBD, but not when it comes to cannabis.

While the FAQs really only cite federal law, the CDPH has apparently been threatening enforcement actions and even pulling products under a California law that most people in the state probably aren’t aware of: the California Sherman Food, Drug, & Cosmetic Law. The Sherman Law is in many respects similar to the federal Food, Drug and Cosmetic Act (which is the basis for the FDA’s power over Hemp CBD). Notably, the Sherman Law prohibits selling “adulterated” food. There are numerous different definitions for when food is “adulterated”, but generally it means that it is poisonous, harmful, or unsafe. Though CDPH has made no public fining that Hemp CBD is actually “adulterated”, it has apparently been using this provision as the basis for its enforcement actions. In fact, the Los Angeles Department of Public Health, which to some extent acts as a local enforcement arm for CDPH policies, issued guidance stating that Hemp CBD was an adulterant.

In response to the claim that Hemp CBD was an adulterant, California Assembly Member Aguiar-Curry introduced AB-228 in early 2019, which would have expressly found that Hemp CBD was not an adulterant. In fact, when I started writing about AB-228 back in January, that’s basically all the bill did, though subsequent amendments would have created a much more robust regulatory framework for Hemp CBD. Unfortunately, the bill stalled out in committee a few months ago, so for now there will be no progress on that front. But we are basically guaranteed to see a revival of the bill in some form or another in the 2020 legislative session.

Also interestingly, there appears to have been no public challenge in the courts over whether Hemp CBD actually even qualifies as an “adulterant”. It is certainly possible that over the next few months, we could see a company that was subject to CDPH or local department of health enforcement sue and claim that Hemp CBD is not an “adulterant”. It’s possible that the CDPH would cite the FDA’s assertions that Hemp CBD could have some toxicity issues, but whether those assertions are sufficient for a state to take enforcement actions under state law is not so clear.

Ultimately, there is no great answer to the question “is Hemp CBD really unlawful in California?”, but there are some good pieces of information to consider:

• While there is no state law that bans Hemp CBD processing, sale, or consumption outside of the licensed cannabis chain, the CDPH or local departments of health may initiate enforcement actions for foods, beverages, animal products, or dietary supplements under federal authority or the Sherman Law.
• There are a number of products that the CDPH has not publicly identified as unlawful, such as cosmetics. The CDPH has jurisdiction over cosmetics under the Sherman Law, and could take the same position that they are not lawful. But they did not do so in the FAQ. It’s also possible that they could take a similar position to the FDA, which has been much less aggressive when it comes to cosmetics unless they make medical claims.
• The law is subject to change quickly. As we live in a state where a couple-page-long FAQ document, rather than a law or regulation, can support enforcement actions against an entire industry, it’s entirely possible that the CDPH or another agency could reverse course or take an entirely new position at the drop of a dime.
• We are pretty much certain that the law will change dramatically in the longer term. The FDA will issue regulations for Hemp CBD (though that may take time), and it’s highly likely that the California legislature will work on new Hemp CBD legislation in 2020.

So stay tuned to the Canna Law Blog as we continue to cover developments on the Hemp CBD front in California.

The Food and Drug Administration (“FDA”) had a busy Monday this week. On November 25, the agency issued warning letters to 15 businesses selling hemp-derived CBD (“Hemp-CBD”) products as unapproved drugs. The FDA also released updated consumer guidance on Hemp-CBD.

Warning Letters

The recent batch of warning letters appear to turn on the marketing of Hemp-CBD products as unapproved drugs. The FDA has approved CBD as a drug: Epidiolex. Epidiolex is used to treat epilepsy and requires a prescription. That’s the only approved use of CBD as a drug. The FDA determines whether something is a drug based on how the product is marketed. Any marketing material that includes a health claim will cause the FDA to classify a product as a drug.

These letters warn Hemp-CBD companies that are making health claims about Hemp-CBD products. In addition, the FDA reiterates its view that Hemp-CBD cannot be added to food or dietary supplements and states that it “cannot conclude that CBD is generally recognized as safe (GRAS) among qualified experts for its use in human or animal food” based on the available data.

Consumer Update

The FDA’s update to consumers makes it appear that Hemp-CBD is a dangerous and unknown substance. Here is the FDA’s own summary of its latest updates:

1. CBD has the potential to harm you, and harm can happen even before you become aware of it.
   • CBD can cause liver injury.
   • CBD can affect the metabolism of other drugs, causing serious side effects.
   • Use of CBD with alcohol or other Central Nervous System depressants increases the risk of sedation and drowsiness, which can lead to injuries.
2. CBD can cause side effects that you might notice. These side effects should improve when CBD is stopped or when the amount ingested is reduced.
   • Changes in alertness, most commonly experienced as somnolence (drowsiness or sleepiness).
   • Gastrointestinal distress, most commonly experienced as diarrhea and/or decreased appetite.
   • Changes in mood, most commonly experienced as irritability and agitation.
3. There are many important aspects about CBD that we just don’t know, such as:
   • What happens if you take CBD daily for sustained periods of time?
   • What is the effect of CBD on the developing brain (such as children who take CBD)?
   • What are the effects of CBD on the developing fetus or breastfed newborn?
   • How does CBD interact with herbs and botanicals?
   • Does CBD cause male reproductive toxicity in humans, as has been reported in studies of animals?

Let’s start with the FDA’s first point, that Hemp-CBD may hurt you and you may not realize it. During the investigation of Epidiolex, there was some evidence that CBD could cause liver injury. The FDA is therefore concerned that the widespread use of Hemp-CBD without doctor supervision, could result in liver damage. That’s an understandable concern. But the consumer update doesn’t stop there.

The FDA goes onto warn about Hemp-CBD interactions with alcohol and other drugs. I don’t want to diminish these interactions as a legitimate concern, but I do want to point out that concerns over drug and alcohol interactions are not limited to Hemp-CBD. Pretty much all drugs can interact with other substances in a negative way. The FDA didn’t frame the issue of Hemp-CBD interactions as something to be aware of or something to watch out for; it was presented as a way that Hemp-CBD can hurt consumers.

Last year, the World Health Organization (“WHO”) issued a report on CBD, concluding that “there is no evidence of recreational use of CBD or any public health related problems associated with the use of pure CBD.” WHO also raised the issue of CBD’s interactions with other drugs, but still reached the conclusion that CBD, as a compound, was generally low-risk to public health.

Let’s move onto the second point about Hemp-CBD side effects. Here is another passage from the FDA’s Hemp-CBD consumer update:

In addition, CBD can be the cause of side effects that you might notice. These side effects should improve when CBD is stopped or when the amount ingested is reduced. This could include changes in alertness, most commonly experienced as somnolence (sleepiness), but this could also include insomnia; gastrointestinal distress, most commonly experienced as diarrhea and/or decreased appetite, but could also include abdominal pain or upset stomach; and changes in mood, most commonly experienced as irritability and agitation.

This passage raises some serious questions about side effects. It does not provide citations to the studies that lead the FDA to determine that these side-effects were serious enough to warrant inclusion on the FDA’s website. Also, how did the FDA make the determination that the most common change alertness is somnolence or the most common change in mood is experienced as irritability and agitation? Also, the FDA’s recommendation that side effects will improve if the use of CBD is stopped or the amount ingested is reduced has to based on clincial information, right? The FDA wouldn’t make an unsubstantiated medical claim online, especially when there is so much misinformation out there regarding Hemp-CBD, would it?

I don’t doubt that the FDA based its above conclusions regarding Hemp-CBD on some set of studies or other data set, but it’s hard to justify the FDA making these claims without any reference to how the FDA reached these conclusions. I’ve written before about how the FDA has a credibility problem with the American public. I don’t think this latest consumer update does the FDA’s credibility any favors.

The third point focuses on questions that remain about the safety of Hemp-CBD. These are important questions and should be considered. The fact is that the interest in CBD has eclipsed the scientific data we have available. The FDA’s questions are important and should be studied carefully. The problem is that the FDA appears to have already made a number of determinations about the dangers of Hemp-CBD without showing its work or refuting the data provided by the WHO.

Conclusion

The FDA’s approach to Hemp-CBD has been one of regulatory inaction and even obfuscation. Rather than providing guidance to or issuing regulations concerning manufacturers of Hemp-CBD products, the FDA has focused on telling consumers and Hemp-CBD businesses that most Hemp-CBD products are not legal and not safe. This latest round of warning letters and the consumer update are a continuation of this approach, but with greater intensity. The consumer update strikes a more urgent and alarming tone and the sheer number of warning letters sent out on one day is a departure from the FDA’s norm. Hopefully, the FDA has also been working behind the scenes to also establish a regulatory framework for the safe manufacture and distribution of Hemp-CBD products. The FDA’s current approach to Hemp-CBD does not seem tenable for much longer.

On November 20th, the Washington State Department of Agriculture (“WSDA”) released the hemp cultivation plan (the “Plan”) that it intends to submit to the US Department of Agriculture (“USDA”) along with a corresponding set of hemp regulations (“Hemp Rules”). This post will provide an overview of Washington’s hemp plan.

Recordkeeping, Violations, and Inspections

The Plan appears to be in-line with the USDA’s interim hemp rules, released last month. The Plan outlines recordkeeping requirements, including how the WSDA will track land where hemp is grown. The Plan also covers some requirements necessary to obtain USDA approval, including the following:

• The treatment of violations, both negligent and those with a higher culpability;
• The WSDA’s annual inspections for (a) unauthorized plant growth, (b) hemp in any form on the registered land area, (c) rogue, volunteer, or off-type hemp plants; (d) audits of existing business data and reports related to hemp; (e) compliance with required signage; and (f) assessing compliance with other applicable license terms and conditions;
• The WSDA’s ability to report information on producers to the USDA; and
• Certifying that the WSDA has resources to undertake the Plan.

THC Testing

The Plan lays out the WSDA’s procedure for testing hemp:

WSDA tests hemp for Total THC using High-Performance Liquid Chromatography (HPLC) for the determination of Δ9-Tetrahydrocannabinol (THC) and Δ9-Tetrahydrocannabinolic Acid (THC-A). Additionally, if necessary, WSDA will conduct moisture testing to determine total moisture.

The Hemp Rules, specifically WAC 16-306-090, require testing by a WSDA-run or approved laboratory using post-decarboxylation or other testing methods approved by the WSDA. WSDA will apply the measurement of uncertainty (+/- 0.06%) outlined in the USDA’s interim hemp rules to the reported THC concentration to determine if hemp material is in compliance with the 2018 Farm Bill. The Plan also includes a detailed sampling protocol for testing hemp. As we’ve written before, these testing requirements are likely to hurt the hemp industry.

Destruction and Disposal

The Plan outlines how the WSDA will dispose of hemp that tests “hot” (too much THC). If that happens, the entire lot must be destroyed. There is a caveat as a hemp producer may request a resampling or retesting within 30 days.

Producers must document the destruction or disposal of all noncompliant hemp and provide corresponding documentation to the WSDA. Producers may subject noncompliant hemp to the following disposal or destruction methods:

• Incineration;
• Tilled under the soil;
• Made into compost;
• Collected for destruction by a person authorized to handle marijuana; and
• Other manner approved by the department that would render the hemp non-retrievable.

In some cases, the WSDA also “may give notice of noncompliance to the appropriate law enforcement agency and the Washington State Liquor and Cannabis Board which regulates marijuana, with a summary of the actions taken to destroy the noncompliant hemp.”

Transportation

The WSDA also will require that producers obtain a THC certification form from WSDA, showing the results of THC testing, for any hemp that leaves the producer’s premises. Producers must ensure that this form accompanies hemp traveling through the state, along with a copy of the producer’s license. For hemp plant material that was grown elsewhere, the WSDA requires a bill of lading or other documentation demonstrating that the hemp was legally imported into Washington and is legally present in the state.

Hemp as food

Washington’s Hemp Plan incorporates some provisions that deviate from the 2018 Farm Bill. Remember, that states and Indian Tribes are free to venture outside of the confines of the 2018 Farm Bill, so long as all the requirements relating to hemp production are met. In other words, the 2018 Farm Bill sets the floor for hemp regulation and states and tribes can expand on that. That’s what Washington has done with hemp cultivated for food.

As a reminder, Washington recently passed Senate Bill 5719, which overhauled hemp production in Washington state. SB 5719 provided that hemp could be used in food. That section of the bill is now codified at RCW 15.140.040 (5), which reads as follows:

The whole hemp plant may be used as food. The [WSDA] shall regulate the processing of hemp for food products, that are allowable under federal law, in the same manner as other food processing under chapters 15.130 [(Washington’s Food Safety and Security Act)] and 69.07 RCW [(Washington Food Processing Act)] and may adopt rules as necessary to properly regulate the processing of hemp for food products including, but not limited to, establishing standards for creating hemp extracts used for food.

The Hemp Rules (WAC 16-306-100) establish a hemp food certification program where hemp producers can voluntarily certify hemp grown for human consumption. The WSDA will provide certification if a producer tests for the following:

• Nonapproved pesticide or herbicide use. A list of approved pesticides and herbicides will be maintained on the WSDA’s website;
• Mycotoxins; and
• Heavy metals, including inorganic arsenic, cadmium, lead, and mercury.

In order to participate in the certification program, the producer must inform the WSDA of their desire to participate in the program and also must reimburse the WSDA the costs of testing.

While WSDA has legal authority over hemp and for manufactured products derived from hemp that fall within the definition of food, WSDA does not have legal authority over all manufactured products. The Hemp Rules (WAC 16-306-020) outline activities outside the scope of the hemp program:

The following activities are not subject to regulatory sanctions or penalties under this chapter, except for the limitation of THC content under chapter 15.140 RCW:
(1) Possessing, transporting, marketing or exchanging legally obtained hemp and hemp products;
(2) Growing, producing, possessing, processing, marketing or ex- changing marijuana as defined in RCW 69.50.101.

The WSDA issued a memo in August indicating that hemp-derived CBD (“Hemp-CBD”) is not an approved ingredient in food. It will be interesting to see how WSDA handles hemp in food going forward. On the one hand, Washington law allows the whole hemp plant, including flower, to be used in food, in accordance with federal law. However, the Food and Drug Administration (“FDA”) has only determined that a few hemp-seed or hemp-stalk ingredients are generally regarded as safe for use in foods. The FDA has also indicated that Hemp-CBD cannot be added to food. CBD is likely to be present in hemp flower, which can be used in food. The WSDA will need to determine how it will treat food that may contain Hemp-CBD from Washington-grown hemp flower.

Conclusion

We’ll continue to monitor the WSDA’s rollout, including whether or not the Plan is altered in light of feedback from the USDA. The USDA has 60 days to approve or deny the plan, so the earliest it could be implemented would be January 2020.

The Agriculture Improvement Act of 2018 (“2018 Farm Bill”) legalized hemp by removing the crop and its derivatives from the definition of marijuana under the Controlled Substances Act (“CSA”) and by providing a detailed framework for the cultivation of hemp. The 2018 Farm Bill gives the US Department of Agriculture (“USDA”) regulatory authority over hemp cultivation at the federal level. In turn, states have the option to maintain primary regulatory authority over the crop cultivated within their borders by submitting a plan to the USDA.

This federal and state interplay has resulted in many legislative and regulatory changes at the state level. Indeed, most states have introduced (and adopted) bills that would authorize the commercial production of hemp within their borders. A smaller but growing number of states also regulate the sale of products derived from hemp.

In light of these legislative changes, we are presenting a 50-state series analyzing how each jurisdiction treats hemp-derived cannabidiol (“Hemp CBD”). Each Sunday, we summarize a new state in alphabetical order. Today we turn to Minnesota.

The Minnesota Department of Agriculture (the “MDA”) has adopted an industrial hemp pilot plan that governs hemp cultivation in Minnesota. The MDA’s program appears consistent with the 2014 Farm Bill: “The Hemp Research Pilot Program studies the growth, cultivation, and marketing of hemp.” And it also appears that the program is consistent with certain provisions of the 2018 Farm Bill: “All first-time applicants must submit an application, pay the program fees, and pass a federal/state criminal background check. An applicant is disqualified from participating in the program if they have a controlled substance-related conviction in the last 10 years.” Minnesota hemp cultivators should therefore be aware that there will be strict requirements for hemp cultivation, unlike other states which have more relaxed rules concerning hemp cultivation.

Minnesota’s primary Hemp-CBD law is SB-12. The hemp provisions of SB-12 take effect on January 1, 2020. SB-12 will allow the sale of non-intoxicating Hemp CBD products and will impose testing and labeling requirements which are relatively strict. It will also allow Hemp CBD products to be sold to marijuana licensees if the hemp was cultivated in Minnesota, which not all other states allow (e.g., California). Per SB-12, the state health commissioner is required to create a workgroup to advise on how to regulate Hemp CBD product and submit a report to the legislature by Jan. 15, 2020. So we expect to see some kind of regulations on top of SB-12, as soon as next year.

While we’re waiting for SB-12 to take effect, there is not much guidance on most kinds of Hemp CBD products in Minnestota. The MDA states that it does not regulate food products containing Hemp CBD and instead defers to the FDA guidelines (which as we all know claim that Hemp CBD can’t be added to foods). For many other kinds of products, there just is no real guidance. And Minnesota has not yet adopted a flavored vape ban, so we don’t yet know (a) if it will, and (b) whether that would apply to Hemp CBD.

There will be a lot of changes to Minnesota Hemp-CBD laws in the future, so please stay tuned for updates.

A couple of months ago I wrote a “Hemp/CBD litigation forecast.” (See here.) One topic of that post was the rise in class actions against Hemp-CBD companies and I noted the consumer class action complaint filed against JustCBD in the Southern District of Florida, Case No. 0:19-cv-62067-RS. The gravamen of the complaint is that JustCBD overstated the quantity of CBD contained in its products on numerous occasions and in violation of representations and warranties it made in connection with selling its products. The plaintiff seeks to represent a class of persons defined as all persons in the United States who purchased JustCBD products that contains specific representations about the amount of CBD in the product. I write today with an update on that case.

On November 18, the defendants filed a joint motion to dismiss the complaint for failure to state a claim. This type of motion – for the unfamiliar – must be filed before a defendant answers the complaint and may be filed against some or all of the claims in the complaint. In simple terms, a motion to dismiss argues: “Court, even if everything alleged in the complaint were true, the plaintiff could not win her lawsuit, so the lawsuit should be dismissed.” More technically, federal courts apply the standards set forth in two Supreme Court cases, Twombly and Iqbal, colloquially referred to by lawyers as Twiqbal. The guiding principle of these opinions is whether the complaint “plausibly” alleges a claim for relief and courts deciding these motions apply the following principles:

1. Although the court must accept as true all facts asserted in a pleading, it need not accept as true any legal conclusion set forth in a pleading.
2. The complaint must set forth facts supporting a plausible claim for relief and not merely a possible claim for relief.
3. Determining whether a complaint states a plausible claim for relief is a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.
4. A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.
5. Mere conclusory allegations do not suffice.

Although a complaint that does not plausibly allege a claim for relief will be dismissed, a plaintiff may be given leave to amend her complaint to cure the pleading deficiency.

The defendants filed a densely packed 27-page motion, let’s go over some of the key arguments that I’ll simplify in some respects for the sake of brevity:

1. Gaddis alleges he purchased two JustCBD products in November 2018 (Honey Tincture and Ribbons) and apparently tested the CBD content of one of the products, which he alleges was below the amount listed on the label. But Gaddis purports to bring claims on behalf of a class claiming that every product sold by JustCBD (roughly 50 different products) is mislabeled. Defendants argue that Gaddis lacks standing to assert claims for products he did not purchase. This appears a well-founded argument. In Twiqbal terms, the issue is whether the court may reasonably infer from Gaddis’ allegations every JustCBD product (roughly 50) had a lower CBD content? Or is Gaddis limited to bringing claims regarding only the products he purchased? I expect the defendants have the better argument here, which if accepted by the court would significantly constrain the class action and the potential liability of the defendants.
2. Gaddis seeks to pierce the corporate veils of the various entities he sued, alleging that a parent company “dominates and controls all aspects” the subsidiaries’ operation. But in Florida – as in most jurisdictions – piercing the corporate veil is a drastic measure taken only in rare circumstances. Defendants argue that the mere fact that one company is a corporate parent or affiliate is insufficient to pierce the corporate veil and that Gaddis’ allegations simply do not plausibly plead the circumstances necessary for a court to reasonably infer that the subsidiaries are “mere instrumentalities” of the parent. I believe the defendants have a good argument here as courts are generally loathe to disregard the corporate forms. A ruling in favor of the defendants would further limit the ability of Gaddis and his attorneys’ to reach into the pockets of the defendant corporations.
3. Gaddis alleges that he and the Class suffered economic injury as a result of the defendants’ conduct. Namely, that they paid a “price premium” for the JustCBD products based on defendants’ express representations about the CBD content of the products. Defendants argue that Gaddis has not plausibly plead a “price premium” injury because he did not plead the specific price he paid, how the price he paid compared to competitors, or how the competitors’ products are comparable to the products he purchase. This argument is persuasive, the deficiency in pleading probably is one that could be corrected. What I mean is that were the court to rule in favor of defendants on this argument, I expect the court would allow Gaddis to try and remedy the deficiency by filing an amended complaint.

Defendants’ motion includes several other arguments including attacks on Gaddis’ claims for (i) violations of New York’s General Business Law §§ 349, 350, (ii) fraud, (iii) violations of the Florida Deceptive and Unfair Trade Practices Act, and (iv) breach of express and implied warranties. I won’t get into those here except to note that fraud claims are subject to a heightened pleading standard under the federal rules and that at least some of the purported deficiencies may be curable.

We will continue tracking this lawsuit and update the blog accordingly. In the meantime, any company involved in selling Hemp-CBD to consumers ought to be working closely with their regulatory attorneys to avoid getting snared by a class action lawsuit. For more reading about advertising and other statements about products see here, here, here, here and here.

As we have previously discussed, the sale and marketing of hemp-infused cannabidiol (“Hemp-CBD”) cosmetics, such as salves, lotions and creams (collectively “Topicals”), present the lowest risk for businesses wishing to enter this booming industry. We have quite a few clients pursuing this path, from small-batch manufacturers to national retail outlets.

Generally, a Topical may be lawfully sold in interstate commerce if it is not (1) adulterated (i.e., unsafe) or misbranded; and (2) intended to be used as a drug. A drug is defined as an “article[] intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease (other than food) intended to affect the structure or any function of the body or man or other animals.” Consequently, any Topical marketed as providing therapeutic values will be deemed a drug (possibly a drug and a cosmetic if the product is also advertising as beautifying or cleaning the body) by the Food and Drug Administration (“FDA”).

If you follow our blog, you know that the FDA has taken issue with Hemp-CBD companies that have made health claims about their products. This is because drug products cannot be marketed without having undergone the FDA’s drug approval process. Accordingly, we have repeatedly advised our Hemp-CBD clients to mitigate the risk of enforcement by avoiding any claims about human health in marketing their products. This precautionary measure has proven particularly important for Hemp-CBD Topicals.

Indeed, many traditional Topicals (i.e., free of Hemp-CBD) contain ingredients that would be treated as drugs if accompanied by health or therapeutic claims. These products include but are not limited to essential oils and menthol.

Because cosmetics are not as heavily regulated as foods, dietary supplements and drugs, the FDA has taken more limited enforcement actions against cosmetic companies, which seems to have emboldened the cosmetic industry to make certain health claims about its products. Statements such as “get glamorously beautiful and enjoy rejuvenating health with menthol crystals” and “our peppermint oil will help you boost energy and aid digestion” have become common on traditional Topical labels.

Given the common use of the statements on Topical labels, it is only natural for Hemp-CBD companies to assume that such claims are safe and acceptable. However, the agency’s growing concerns towards the use of CBD and its scrutiny of the Hemp-CBD industry, have heightened the risks of enforcement actions against Hemp-CBD companies that are making any health claims, even claims other companies have gotten away with, and that do not address the medicinal values of CBD.

This point is highlighted in some of the warning letters issued by the agency against Topical companies that promoted the therapeutic value of their product ingredients, including essential oils, menthol and CBD. For example, in 2018, the FDA took issue with the following statements made by Signature Formulations LLC:

Included in the Herbal Muscle Mist formula are menthol and camphor for pain relief, invigoration of tired muscles and joints, and cramps. MSM (methylsulfonylmethane) provides sulfur and methy (sic) groups that are used for healing and repair by our joints and connective tissue. Clove Oil and Sweet Birch Oil may help to stimulate circulation and reduce tension and spasms in muscles. Also included are the essential oils of peppermint and eucalyptus to help reduce inflammation and soothe aching feet and irritated nerves.”

and

Fast absorbing gel reduces inflammation and pain quickly with triple active ingredients. Our gel combines the natural anti-inflammatory power of CBD with the soothing effects of Camphor and Menthol. CBD Gel helps relieve arthritis pain and sore, overworked muscles.”

As the agency explained in the letter, Topicals that contain essential oils and menthol and that are marketed to temporarily relieve minor aches and pains of muscles and joint are treated as over-the-counter (“OTC”) external analgesic drug products. Because OTC external analgesic products are drugs, their use in a product marketed to temporarily relieve minor aches and pains of muscles and joint or other medical conditions violates the Food, Drug and Cosmetic Act.

Note that the same products if free of health claims and strictly advertised to cleanse the body or make a person more attractive would be treated as a cosmetic. Consequently, any Hemp-CBD company wishing to infuse their Topicals with ingredients such as essential oils or menthol have a legal pathway to do so long as they refrain from making any therapeutic claims about their product, to ensure that they remain within the confines of “cosmetics” as defined under federal law. Note that in addition to not being intended as drugs, these products may be lawfully sold and marketed in interstate commerce if they are safe/properly manufactured and comply with FDA labeling requirements.

For more information on this issue, feel free to contact our regulatory team.