Oregon Hemp: The Permanent Rules Are Now In Effect

While Oregon legalized hemp production in 2015, the Beaver State has seen a huge influx of hemp grower and handler registrations since the enactment of the 2018 Farm Bill, which legalized hemp under federal law.

To keep up with the growing interest in the crop and its derivatives, the Oregon Department of Agriculture (“ODA”) has been actively revising its rules and finally adopted their permanent version on May 15th.

Specifically, the rules make permanent the temporary rules that were filed around March 1 and the proposed rules that were filed at the end of March. They should be in place for a while, or at least until the state legislature adopts HB 2740 or yet another hemp statute.

Many of our hemp clients have been asking how these rules would impact their businesses. Because it’s been a while since we ran through program basics, we thought it might be helpful to summarize them here on the blog.

Overall, the permanent rules do the following:

  • Update the testing rules to conform to the changes made by the Oregon Health Authority in December 2018. The rules impose specific testing requirements based on the type of products involved, which include:
    (1) industrial hemp for human consumption and hemp items;
    (2) industrial hemp for human consumption and usable hemp;
    (3) hemp concentrate or extract intended for use by a person to make a hemp cannabinoid product;
    (4) finished hemp concentrate or extract; and
    (5) finished hemp cannabinoid products.
  • Clarify and update recordkeeping and reporting requirements imposed on registrants. The proposed rules put a few additional reporting and recordkeeping requirements on the registrants’ shoulders, but nothing too demanding.
  • Clarify the option registered growers have to resample in the event a harvest lot fails pre-harvest testing. Under the new rules, both samples and filed duplicate samples must be reanalyzed if they fail testing.
  • Establish a fee for the submission of a change form. Under the new rules, registrants who wish to update their registration, such as adding a grow site to an existing registration, will be charged a $125 fee.
  • Adopt a fee schedule for pre-harvest THC testing provided by the ODA. The new hemp sampling fees would be increased by approximately 33 percent to cover the ODA’s cost associated with collecting regulatory samples. The proposed rules include additional fees, including travel time and overtime charges for services performed by the Department of Administrative Services.
  • Clarify requirements for individuals making retail sale of industrial hemp in the state. Those who sell industrial hemp items to consumers will no longer be required to test the item for potency before sale so long as the hemp ingredient used in the product has a compliance test at or below 0.3 percent total THC (THCA converted to delta9 and delta9 THC).
  • Change testing requirements for THC and CBD potency in final products. A finished hemp cannabinoid product must be tested for THC and CBD concentration in the same manner as cannabinoid products under OAR 333-007-0340 before it can be sold or transferred to a consumer.

In addition, the permanent rules address issues that shall go into effect on January 1, 2020. These issues include:

  • Revision of sampling procedures for pre-harvest THC testing. Specifically, the rules require that the total THC be tested, which the ODA has concluded is required by the 2018 Farm Bill.
  • Restructure of handler registration application process and fees, which adds the option for registration by reciprocity for OLCC-licensed processors who hold a hemp endorsement to process hemp with the OLCC Recreational Market.
  • Restructure the grower registration application and fees. In lieu of a $1,300 hemp grower application fee, the permanent rules provide for two separate fees and applications: (1) a fee of $250 for a grower registration application, and (2) a fee of $500 for each grow site registration application. Under this new structure, the average grower would pay lower registration fees ($750-1,250) because a majority of registered growers currently farm two or fewer fields.

For more information on the new permanent rules, don’t hesitate to contact our team of cannabis and CBD attorneys.

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USPTO Issues Clarification on Hemp-Related Trademarks

Earlier this month, the United States Patent and Trademark Office (USPTO) issued Examination Guide 1-19: Examination of Marks for Cannabis and Cannabis-Related Goods and Services After Enactment of the 2018 Farm Bill. While the guide didn’t provide any earth-shattering news regarding cannabis-related trademarks, it did clarify the USPTO’s position with respect to trademarks for domestic industrial hemp products.

The USPTO began by reiterating what we have written about extensively: “Use of a mark in commerce must be lawful under federal law to be the basis for federal registration under the U.S. Trademark Act.” Even where the goods or services for which protection is sought are legal under state law, if the goods or services violate federal law, including the Controlled Substances Act (CSA), they will not be eligible for trademark protection. The USPTO cites the following laws as applying in the analysis for whether or not a cannabis or hemp-related mark will be eligible for trademark registration:

  • The Controlled Substances Act, 21 U.S.C. §§801 et seq
  • The Federal Food Drug and Cosmetic Act, 21 U.S.C. §§301 et seq (FDCA)
  • The Agricultural Improvement Act of 2018, Pub. L. 115-334 (the 2018 Farm Bill), which amends the Agricultural Marketing Act of 1946 (AMA).

The 2018 Farm Bill, as we have written, and which was signed into law in December 2018, removed “hemp” from the CSA’s definition of “marijuana,” meaning that cannabis plants and derivatives such as CBD that contain no more than 0.3% THC on a dry-weight basis are no longer controlled substances under the CSA.

Because of this, the USPTO states that, “[f]or applications filed on or after December 20, 2018 that identify goods encompassing cannabis or CBD, the 2018 Farm Bill potentially removes the CSA as a ground for refusal of registration, but only if the goods are derived from ‘hemp.’ Cannabis and CBD derived from marijuana (i.e., Cannabis sativa L. with more than 0.3% THC on a dry-weight basis) still violate federal law, and applications encompassing such goods will be refused registration regardless of the filing date.”

But don’t get too excited yet. The USPTO also makes note of the elephant in the room when it comes to CBD: the FDA. The guide notes that, “even if the identified goods are legal under the CSA, not all goods for CBD or hemp-derived products are lawful following the 2018 Farm Bill. Such goods may also raise “lawful use” issues under the Federal Food Drug and Cosmetic Act.”

Because the 2018 Farm Bill explicitly preserved the FDA’s authority to regulate products containing cannabis or cannabis compounds under the FDCA and because CBD is an active ingredient in FDA-approved drugs and is a substance undergoing clinical investigations, “registration of marks for foods, beverages, dietary supplements, or pet treats containing CBD will still be refused as unlawful under the FDCA, even if derived from hemp, as such goods may not be introduced lawfully into interstate commerce.”

This is a point we’ve been making for quite some time now – the federal lawful use requirements implicate not only the CSA, but also the FDCA, meaning that until we see some movement from the FDA on the issue, trademark registrations for CBD products disallowed by the FDA will not be available.

The guide also notes that for all applicants that reference “hemp” in their specification of goods and services, the examining attorney will issue inquiries concerning the applicant’s authorization to produce hemp and applicants will need to provide additional statements to confirm that their products and activities comport with the 2018 Farm Bill.

So, while the USPTO’s release of this guide certainly isn’t earth-shattering, it does affirm the strategies we have been utilizing to secure trademark protection for our clients. This is a nuanced area of law, and if you are seeking to develop a brand protection strategy for your CBD or hemp products, it would be wise to consult with an attorney well-versed on the subject.

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Cannabis and International Trade: Don’t Ignore the U.S.-China Trade War

Marijuana and hemp companies should not ignore the US-China trade war. Numerous products and components in these industries might be subject to increased tariffs of 25 percent. If cannabis companies can’t find new suppliers, those are costs that they will have to bear, or will have to pass on to their consumers.

The Office of the U.S. Trade Representative (“USTR”) recently published a notice in the Federal Register confirming President Trump’s increase on tariffs from 10 percent to 25 percent on U.S. imports of Chinese products valued at $200 billion. Here is the list of products now subject to a 25% tariff. They include products such as:

  • Cigarette paper
  • Hemp seeds
  • True hemp products
  • Other manufactured tobacco, tobacco substitutes, tobacco extracts or essences, other, to be used in products other than cigarettes
  • Folding cartons, boxes and cases of non-corrugated paper or paperboard

The list goes on and on. Many of the products that will now be subject to 25 percent tariffs are used for consumption of cannabis (e.g., cigarette papers), or as components in vape accessories or packaging for products. Even hemp itself is included. These tariffs will lead to increases in the prices of marijuana, hemp products, and accessories if they are manufactured in China—and this comes at a time when China is ramping up production of hemp-derived cannabidiol (“CBD”) products, which U.S. companies may already be selling. (As an aside, if you’d like to read about the legality of importing CBD products, check out our recent posts here and here).

President Trump has also threatened to impose 25% tariffs on the remaining $325 billion of Chinese goods if negotiations do not result in a “good” deal to the satisfaction of the United States. Even if your imported Chinese products are not currently being hit with tariffs, there is a very real possibility that they soon will be.

Not surprisingly, our law firm’s international trade lawyers have been getting a steady stream of questions from American companies that import products from China and from companies from all over the world (China, Europe, Australia and Japan, mostly) that export Chinese products to the United States. These companies first want to know whether their product(s) are subject to the new 25 percent tariff and when that tariff will take effect. The answer to their first question depends on each company’s exact product(s) and is not always clear for cannabis companies. The answer to the second question is that the 25 percent tariff applies “to goods (i) entered for consumption, or withdrawn from warehouse for consumption, on or after 12:01 a.m. eastern daylight time on May 10, 2019, and (ii) exported to the United States on or after May 10, 2019.” In layperson terms, this 25 percent tariff applies to goods that left China on or after May 10.

The most important thing you can do if you believe you have been hit by the 25% tariffs is to not panic. We say this for two reasons. One, many who believe their products are subject to tariffs have been wrong and many who believe their products are not subject to tariffs have been wrong as well. Understanding whether or not a particular product is covered is not as easy as one might believe and for that reason, all of the international lawyers in my firm are turning the question of inclusion or exclusion over to our international trade lawyers because this is what they do. When various tariffs take effect can also be quite complicated. Two, we have seen panic drive too many companies to make major mistakes that end up costing them way more than the tariffs would have.

So, before we discuss what companies should do about their tariff problems, we will first discuss what you should NOT do. You should not have your China products shipped to Vietnam or Taiwan or Malaysia or Thailand or anywhere else and then have those products shipped to the United States claiming they are not from China—even if your partners in China are telling you that this is okay. This sort of “transshipping” can and does lead to massive fines and to JAIL TIME. I am not kidding. Just by way of one example, here is a very recent case (on which my firm’s international trade lawyers assisted the US Government) where a company paid US $62.5 million “to resolve allegations that it evaded $36 million in antidumping duties.”

U.S. Customs has become expert at discovering such evasions and the penalties when caught have become very harsh. Importers that knowingly falsely label the country of origin on their imports are subject to significant fines and penalties under 19 U.S.C. § 1592 and to criminal prosecution under 18 U.S.C. § 542 (import by using false statement) and 18 U.S.C. § 545 (smuggling). Lying about your products country of origin can subject you to 20 years in Federal prison.

In the regulated marijuana industry, civil and/or criminal penalties could have the two-fold effect of terminating your cannabis license. So that production facility you just spent two years and a few hundred thousand dollars building and getting licensed could be taken away instantly if one of your partners attempts to circumvent import laws and gets busted. Even for CBD products which are typically not subject to regulatory licenses (yet at least), the FDA still has authority over certain imports (see response to Q15), so transhippers are may wind up getting doubly tagged by the FDA.

If you do not realize the U.S. government would like nothing more right now than to catch and punish those who transship China products to avoid the new China tariffs, you have not been reading the news. The U.S. government (and even the U.S. populace as a whole) are eager to act harshly against anyone who engages in transshipping Chinese products. And when it comes to cannabis companies and international relations, the U.S. government has taken an even more aggressive approach (see here, here, and here).

One of the biggest hammers against transshipping is the False Claims Act (“FCA”). The FCA (31 U.S.C. § 3729) allows people or companies to bring “qui tam lawsuits against individuals or companies that defraud the federal government. Damages under these claims can be tripled and anyone who knows of the fraud (including a competitor company) may file a qui tam lawsuit.

Qui tam actions are brought to attack competitors and to get 15 to 30 percent of the triple damages the U.S. Government can recover from the lawsuit. Your competitors, your importers, your own employees, or even your Chinese manufacturers who told you that transshipping was legal are the most likely to initiate a qui tam lawsuit against you, but sometimes it is just someone who learned of what you are doing. Because the person or company that brings such an action can be awarded millions of dollars, the incentive to file such lawsuits is huge. And because in states like California, companies are still racing to secure cannabis licenses and market share, we wouldn’t be surprised if qui tam lawsuits for transshipping or even just reporting to the feds to gain a leg up on the competition becomes commonplace.

What is your duty as the US buyer/importer to make sure the products you are importing are truly from the country listed on the import documents?

The examples below are illustrative.

  • A US importer is told by its Chinese producer/exporter whose products will be covered by the China tariffs not to worry about the tariffs because the Chinese company will ship the product through Taiwan and list them as Taiwan products. The importer should decline this offer because if it imports this product knowing it is from China and not Taiwan, it will be criminally liable under U.S. customs law and subject to potentially massive damages under the U.S. False Claims Act.
  • A US importer suspects its Vietnamese “producer” is not actually making anything, but rather simply transshipping product that comes from the Chinese company that owns the Vietnamese “producer” company. The company visits the Vietnam “producer” facility and it does not appear anything is actually being produced there. The US importer raises this concern with the Chinese company which tells the US company that it can avoid any problems by being listed as the consignee of the products and not the importer of record since it is the importer who is at risk. This too is simply wrong information.

Transshipment is a crime and Chinese companies and their U.S. importers can have very different interests when it comes to importing product into the United States. The Chinese company wants to ship product to the U.S. above all else and the U.S. importer should above all else want to avoid trouble with U.S. Customs, to avoid civil/criminal liability, and to not risk their hard-earned cannabis licenses. If you are doing business with a person or company using transshipments to minimize U.S. customs duties, you and your licenses could be in very big trouble and you should contact a lawyer immediately.

Now let’s turn to what you can do to fight back against the U.S. tariffs being imposed on goods coming in from China.

There is often a lot you can do to legally change your products’ country of origin (though this may be tougher for hemp than for electronics). The rules for figuring out a product’s appropriate country of origin are incredibly complicated and best left to experienced and qualified international trade lawyers, especially with all that is going on between China and the United States these days. Even our China lawyers do not claim to be qualified on this score; our attorneys tell our clients who ask for country of origin help something like the following:

Putting together your electronics product in China and then shipping it to Vietnam for a plastic case to be put on will not qualify that product as having been made in Vietnam. That much we do know. Beyond this though, you are going to need to consult with our trade and customs lawyers because this is not something you can afford to get wrong.

So yes, it may be possible for you to make minor (or major) changes in how you are having your products made so they can legally avoid the China tariffs, but you truly must tread carefully here and whatever you do, do not just go along with what your China factory is telling you to do. It is your company and your money and your freedom that is at stake and this is not something on which you should be taking advice from anyone but an expert who is looking out for your interests.

One of the questions we ask our clients is what will happen to your product sales if your products from China are subject to a 25 percent tariff and your competitors’ products are not? Answering this question requires knowing whether your products or your competitors’ products will come in duty free from Thailand or be subject to a 7% duty (or whatever) from Vietnam. I mention this because generally (though certainly not always) duties from Thailand and the Philippines are lower than duties from Vietnam, so even in choosing which non-China country you are going to use for your manufacturing, you need to know your way around the duty charts.

If you are going to take your Made in China products and have them partially made in some third country so as to have that product qualify as having been made in that third country (and not China) that product will need to be “substantially transformed” in that third country. One of my law firm’s international trade lawyers describes the substantial transformation requirement as follows:

Substantial transformation dictates that a product consisting of components/materials from more than one country is a product of the country where the components/materials become a new and different article of commerce with a name, character, and use distinct from that of the components/materials from which it was transformed. The CBP makes its substantial transformation decisions on a case-by-case basis, though U.S. importers may seek advance rulings on origin covering specific products for import.

The rules on substantial transformation are anything but clear-cut and the country of origin for your products should be determined on a case-by-case basis by a qualified international trade lawyer.

You also may be able to secure an exemption from tariffs for your product(s), just as was true regarding the previous rounds of tariffs—though with the federal stance on many hemp and CBD products, it may be less likely. The exact process for how to do this and the corresponding deadlines have not yet been announced but we expect both will be very similar to the previous tariff rounds and our international trade lawyers are already gathering information from clients so as to be prepared.

You also will be able to make what is called an exclusion request. These too will have their deadline dates and these exclusion requests typically include the following:

  • Identify the product you want excluded. The U.S. list of targeted products is identified by the Harmonized Tariff Schedule (“HTS”) number that is used to declare the product when imported into the United States. A company needs to identify the commercial name of the product, the HTS number for the product, and any other industry designation of the product under a recognized standard or certification (for example: ASTM, DIN).
  • A description of the product based on physical characteristics (for example: chemical composition, metallurgical properties, dimensions) so your product can be distinguished from other products that would still be covered by the tariffs. A significant concern in considering exclusion requests is whether granting a specific exclusion request will create a loophole many other products can also use.
  • The basis for requesting an exclusion. Is the product unavailable from a domestic U.S. supplier and thus imports are needed to fill a demand no U.S. supplier can fill? Are there certain qualification requirements only the import supplier can satisfy? Have you been put on allocation by domestic suppliers? Are there alternative suppliers in any country other than China?
  • The names and locations of any producers of the product in the United States and in foreign countries.
  • Total U.S. consumption of the product by quantity and value for each year for the past three to five years (2013–2017) and projected annual consumption for the next few years (2018–2020), with an explanation of the basis for the projection.
  • Total U.S. production of the product (or possible substitutes) for each of the past three to five years.
  • Discussion of why the U.S. products (or substitute products) cannot be used in place of the imported products.
  • A good story why your company deserves the exclusion it is requesting. This typically includes the history of your company (e.g., fifth generation family-owned), the products produced by your company, the strategic significance of your company’s products, the number of workers in your company, and your company’s annual sales.

The difference between the exemption process and the exclusion process is that a successful exemption will lead to the removal of tariff line items from the tariff list whereas a successful exclusion will remove specific products from the tariff item. In other words, the requirements for the exclusion process are much more product specific; if you have five different types of widgets, you will have to make six different product exclusion requests.

A new round of 25 percent tariffs is here and more may be coming. Now is the time to figure out what to do to ameliorate their impact on your cannabis business.

Editor’s Note: A version of this post was previously published on our firm’s China Law Blog.

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Oregon Hemp Litigation: Multi-Million Dollar Crop Delivery Lawsuit Filed

Big Bush Farms (??) is after $267 million (!!!)

We recently wrote about hemp production contracts, noting that scope and scale of commercial hemp production and the related contracts and lawsuits are likely to dwarf the dollar values we typically see in recreational marijuana. That post discussed a $57 million lawsuit arising from a hemp production contract and lists some issues for growers and buyers to consider before contracting for the production and sale of hemp.

A multi-million dollar lawsuit filed last week in Oregon confirms our view that litigation concerning hemp production is on the rise. According to the complaint, the plaintiff, Big Bush Farms (“Big Bush”), is a licensed grower of industrial hemp, the defendants, Boones Ferry Berry Farms (“Boones”) and other individuals operate a large farm in Hubbard Oregon. Big Bush alleges that Boones had no experience or familiarity with growing industrial hemp before working with Big Bush and had previously purchased bad, unfeminized seed. Big Bush provided Boones with good seed and instructed defendants on “best hemp farming practices” so that Boones could grow hemp for Big Bush. (Just what are best hemp farming practices?)

In late May 2018, Big Bush and the defendants entered into a production contract. Boones agreed to plant, grow, dry, and harvest 27,000 plants for Big Bush. Boones agreed to pay all costs relating to the grow (note that in the prior post on hemp contracts the purchaser paid those costs) and Big Bush agreed to pay $25/lb for all the hemp harvested from the 27,000 plants, plus a bonus of $1/lb for every 2% CBD oil content over 10%. Payment for the crop was due at several intervals on or after the delivery of the crop. The contract called for Boones to use “best farm practices, knowledge and experience to produce the maximum yield and highest quality product.” Boones also agreed to grant Big Bush access to the farm as requested.

Big Bush alleges that Boones harvested 108,000 lbs of dried biomass which tested at 14.5% cannabidiol (“CBD”) oil content. This made a for a contract price of $27.25/lb, when including the CBD % bonus. Big Bush alleges that Boone’s demanded a price in excess of the contract price and falsely claimed the harvest yielded on 14,582 lbs of biomass. Boones apparently delivered only around 4,200 lbs of the crop even though Big Bush had prepaid $150,000. Big Bush claims that Boones failed to deliver the remaining 103,747 lbs of hemp and failed to deliver other hemp grown pursuant to an oral agreement.

Big Bush brought the usual contract related claims and alleged more than $267 million in damages. (Note: This figure seems a bit odd since 103,747 x $27.25 = $2,827,105.75 and the damages under the alleged oral agreement don’t make up the difference.) Although a farmer’s refusal to deliver a crop is not a typical issue, one wonders if the parties’ contract couldn’t have been structured to provide the buyer more protections.

Stay tuned for updates on this and other hemp-related litigation. There will be a lot of it.

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Take Your Hemp or CBD Company Public on the TSX

Banking, intellectual property, food and beverage (and cosmetics), international trade, domestic trade, state laws, ag production contracts, etc., etc. When it comes to industrial hemp, the 2018 Farm Bill upended all of these things. Our cannabis business lawyers have been busy advising a large number of new hemp and hemp-CBD businesses getting in on the fray, as well as some large and well-established companies exploring options in the space. All told, the amount of private capital flowing into hemp and hemp-CBD is extraordinary. And public money is on the way.

Prior to federal legalization of hemp last December, a few pioneering hemp companies had gone public. These companies acquired listings on secondary Canadian exchanges like the CSE, which is an alternative stock exchange with simplified reporting requirements and reduced barriers to listing. That exchange takes U.S. marijuana companies, too, and there are quite a few of them these days. The CSE caters to micro cap and emerging companies and it does not have the restrictive policies of the old-guard TSX (and TSXV) which is the primary Canadian exchange (and the eighth largest in the world, by market cap). Unlike the CSE, the TSX / TSXV does not allow for the listing of companies invested in activities which violate U.S. law with respect to cannabis.

Still, a lot of companies would like to be listed on the TSX / TSXV. While the listing requirements are intensive by comparison, issuer opportunities are more expansive on everything from international institutional investment to specialized indices to overall visibility. Given all of that, it was interesting last month when we got word from a multi-national Canadian law firm we work with that TMX Group had advised its lawyers that the TSX / TSXV is open to the listing of US hemp and CBD Issuers that operate in states where such operations are legal.

The TSX / TSXV is apparently taking the position that this is not a change in policy, as an issuer must still satisfy the exchange that the issuer complies with all applicable laws in the jurisdictions in which it operates. However, the exchange is now generally satisfied that Hemp / CBD activities are now legal in the US at the federal level in light of the 2018 Farm Bill. It seems unlikely that the TSX / TSXV will issue a formal notice on this development (given its position that it has not changed its policy), but we think the exchange got it right this time.

So what does this mean for U.S. hemp companies? More possibilities. More reach. More access to institutional capital. More legitimacy. More visibility. We may also start seeing certain companies divest themselves from marijuana entirely in favor of hemp, and we may see a rash of uplisting in the near future. As far as major U.S. exchanges, like the NYSE and Nasdaq, we may see some northern influence with respect to those exchanges’ policies on the acceptance of hemp-only and CBD-only listings. To date, those exchanges have only agreed to list Canadian cannabis producers, but with native companies like Walgreens moving into the CBD space, it’s only a matter of time until we see a U.S. hemp-co listing.

The U.S. exchanges should be put to a decision very soon, but for now the TSX / TSXV joins the CSE as wide open for U.S. hemp and CBD companies operating as per the 2018 Farm Bill.

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The TTB Clarifies Its Position on Adding CBD to Alcoholic Beverages

Last week, the U.S. Alcohol and Tobacco and Trade Bureau (“TTB”), which regulates the alcohol industry, released new information regarding the use of hemp-derived ingredients in the formulation of alcoholic beverages. The industry circular came as a response to numerous inquiries from the alcohol industry about whether alcoholic beverages containing cannabidiol (“CBD”) derived from hemp (“Hemp-CBD”)—which was legalized under the 2018 Farm Bill—may be produced.

The overall message of the circular confirms the conclusion we reached a few months ago, that the TTB will not currently approve the use of Hemp-CBD in the formulation of wine, beer and liquor.

Although the TTB oversees the formulation of alcoholic drinks, the agency works closely with the Food and Drug Administration (“FDA”) in determining whether the ingredients added to those beverages are safe for consumption and whether their use is lawful under the Food, Drug & Cosmetic Act (“FDCA”). Indeed, the FDA is tasked with protecting public health by ensuring that foods and drinks introduced into interstate commerce are safe.

As we previously discussed, any substance that is intentionally added to food (including drinks) is subject to FDA premarket review and approval, unless the substance is generally recognized as safe (“GRAS”). Because the FDA has yet to approve CBD (including Hemp-CBD) as a food additive, CBD-infused drinks are deemed unsafe under the FDCA. Moreover, the FDA deems the use of hemp-CBD-infused foods and drinks as unlawful because CBD has been approved in the treatment of epilepsy (Epidiolex); and therefore, cannot be concurrently marketed as a food. Consequently, the FDA treats Hemp-CBD infused alcoholic beverages as unsafe and unlawful under the FDCA.

Given its deference to FDA guidelines, the TTB has determined that, at this time, it will not approve formulas of alcoholic beverages infused with Hemp-CBD. In addition, the agency has decided that it will return for correction any applications for formulas containing “hemp” ingredients.

However, the TTB will continue to accept and review applications for alcoholic beverages derived from parts of the hemp plant that do not contain CBD, such as hulled hemp seeds and hemp seed oil—both of which have been deemed GRAS. Such formulas will be approved if the applicants successfully demonstrate, through laboratory analyses of hemp ingredients, that the ingredients are not controlled substances.

In the circular, the TTB left open the possibility that formulas containing hemp-derived CBD could be approved down the line if the FDA determines that Hemp-CBD could be lawfully marketed in food products. Nevertheless, alcohol companies would still have to submit formula applications to the TTB before selling the products.

The agency further declared that it will closely monitor FDA actions and guidance on CBD as it continues to review its existing policies. This statement most certainly refers to what will come out of the public hearing the FDA will be holding on May 31, during which stakeholders will share their thoughts on potential pathways by which CBD products may be legally sold and marketed.

So for now, members of the alcohol industry who want to lawfully enter the booming CBD market will need to stick to hemp seed ingredients which, as we just explained, are the safest path through this booming market. For more information on this issue, feel free to reach out to our team of cannabis and CBD attorneys.

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Hemp Seed Ingredients: A Safe Path through the CBD Market?

As we previously explained, under the Food, Drug, and Cosmetic Act (“FDCA”), any substance that is intentionally added to food (including drinks) is a food additive. A food additive is subject to premarket review and approval by the Food and Drug Administration (“FDA”), unless the substance is generally recognized as safe (“GRAS”) by qualified experts under the conditions of its intended use.

Because the FDA has yet to approve CBD (including CBD derived from hemp) as a food additive, CBD-infused foods are deemed unsafe under the FDCA. But what about other hemp-derived ingredients free of CBD?

On December 20, 2018, the FDA completed its evaluation of three GRAS notices issued by Fresh Hemp Foods, Ltd. for hemp seed ingredients and concluded that (1) hulled hemp seed, (2) hemp seed protein powder, and (3) hemp seed oil can be lawfully marketed in human food.

According to Fresh Hemp Foods, Ltd.’s notices, hemp seeds do not naturally contain tetrahydrocannabinol (“THC”) or CBD. However, the hemp seed ingredients subject to these GRAS notices contained trace amounts of THC and CBD, which was likely caused by the seed’s contact with other parts of the plant during harvesting and processing. The FDA’s response to the GRAS notices (“Response”) suggests the agency does not take issue with very small quantities of CBD and THC in food ingredients. In fact, in its cannabis and cannabis-derived product Q&A, the agency explained that the three GRAS hemp seed ingredients could be legally marketed in human food, and thus, lawfully sold in interstate commerce.

However, in its Response, the FDA stated that all hemp seed ingredients are not inherently GRAS under 21 CFR 170.35. The agency clarified this point in its Q&A by stating that the GRAS conclusions could apply to hemp seed ingredients marketed by other companies, so long as (1) the ingredients are manufactured in a way that is consistent with the notices; and (2) they meet the listed specifications, including but not limited to the same specific use of the ingredients in food.

Some of the intended uses for these hemp seed ingredients include adding them as source of protein, carbohydrates, oil, and other nutrients to beverages, soups, dips, spreads, sauces, dressings, plant-based alternatives to meat products, desserts, baked goods, cereals, snacks and nutrition bars.

Therefore, these GRAS notices suggest that companies may lawfully add any of the three hemp seed ingredients to food products so long as their products are:

  1. intended for human consumption;
  2. manufactured in a manner that is consistent with the GRAS notices;
  3. contain no more trace amounts of THC and CBD than those found in the GRAS hemp seed ingredients;
  4. meet other specifications found in the notices; and
  5. comply with all relevant laws and regulations regarding food under the FDCA, including but not limited to good manufacturing practices and labeling requirements.

More and more CBD companies are jumping on the hemp-seed-bandwagon as it can afford a safer path to entering the booming “CBD” market. If you would like to learn more about this alternative track, do not hesitate to contact our team.

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Avoid Hemp Litigation with a Real Agricultural Production Contract

As everyone knows by now the 2018 Farm Bill legalized hemp production by de-scheduling the crop under the Controlled Substance Act. We’ve written extensively about federal hemp rules and regulations as well as those in California, Oregon and Washington. We’ve also addressed hemp in terms of USDA Organic Certification, international trade issues, and the FDA stance on hemp derived CBD in cosmetics. We’ve also offered a free webinar on West Coast Hemp CBD. We’re on it.

In light of the breaking news that California has opened up for commercial hemp cultivation and that the Oregon growing season had just begun, this post concerns the more granular topic of agricultural production contracts – i.e. the contracts at the start of the supply chain between farmers and consumers.

What is an Agricultural Production Contract (“APC”)?

Broadly speaking an APC is an agreement between producers and contractors for a specific agricultural commodity. These contracts typically specify the production practices to be used, identify the party responsible for supplying the required resources for production, and specify the quantity, quality, and method of payment for the commodity. APCs are used by farmers, ranchers, and agribusinesses to manage risk and control expenditures. Payment is typically predetermined and outlined in the contract.

An APC is one of several ways in which the marketplace handles the purchase and sale of agricultural commodities. Others include cash forward contracts, which concern the sale of a fixed amount of the commodity at a set price for future delivery; marketing agreements, in which a member of a cooperative agrees to sell some or all of a commodity produced through the organization, and futures contracts, in which the sale and purchase of a standardized quantify of a commodity is negotiated for future delivery on a regulated commodity exchange. An APC by contrast means the sale or production of a specified commodity or commodities by the grower to an identified party under an agreement signed in advance.

Lock in your APC and focus on the hemp.

The APC contract model has associated benefits and risks. An APC may help agricultural companies (i) control quality by providing for control over the production methods, (ii) manage supply, and (iii) protect a company’s intellectual property and control the unauthorized reproduction or sale of a crop. An APC may benefit the grower by (i) reducing financial risk by making the contractor responsible for the costs of production, (ii) providing access to capital financing, and (iii) permitting access to new technology or markets.

An agricultural production contract is a complex creature typically governed by state law including the Uniform Commercial Code. Legislators in several states have proposed, and in some cases enacted, laws concerning the terms of agricultural production contracts. In 1990, Minnesota became the first state to enact such laws. Other states, including California, Oregon, Washington, have enacted various statutes that relate to payments, liens, bailments, and duration of the contract.

Why Should I Care?

Because money. (As people say nowadays). The scope and scale of commercial hemp production is likely to dwarf the sort of farming operations that one sees in the recreational cannabis industry. So the dollar values and the corresponding risks are much higher for everyone involved.

Take, for example, a lawsuit filed not long ago in Oregon in which the plaintiff seeks to recover some $57 million from the defendants over an alleged breach of an agricultural production contract (a “Sharecrop Agreement” as defined the complaint). Under the agreement, the defendant agreed to plant, grow, dry, and harvest 13 acres of hemp at 1,450 plans for acre, for a total of 19,000 plants. The plaintiff agreed to pay all actual costs associated with the crop, which plaintiff would then sell, be reimbursed for expenses, with the remaining balance sold a particular price per pound divvied up between the plaintiff and the defendant. At the outset of the deal this may have looked good from the defendant’s perspective – since plaintiff was covering production costs and responsible for marketing and selling the crop. The defendant, however, promised that it would use “best farm practices” and promised to deliver a “top quality product with a minimum of 10% on average CBD oil content as determined by a random test collected by Farmer and Buyer.” But then things went south, according to the plaintiff, when the defendant refused to hand pick the crop (is this what “best farm practices” means?) and failed to meet the 10% on average CBD oil content, and only allowed the plaintiff to pick up half of the 217,227 lbs of crop. The plaintiff claims that the first two allegations reduced the value of the crop and the last amounted to theft that altogether caused tens of millions in damages.

What Should I Do?

Hemp farmers and purchaser of industrial hemp should carefully consider the special issues that industrial hemp presents before entering into contract for hemp production. Here are some of the factors parties to an industrial hemp production contract should consider before signing on the dotted line:

  • Do state laws restrict or regulate the terms of agricultural production contracts?
  • What are the contractual and regulatory consequences for the farmer and buyer who do not quite follow the letter of the law governing agricultural production contracts?
  • What happens if the state licensing authority revokes the growers ability to sell, store, or transfer hemp?
  • What happens if the hemp does not satisfy pre-harvest THC testing?
  • What happens if the hemp does not satisfy post-harvest THC testing?
  • When will the testing for CBD or other components of hemp occur?
  • How is the hemp chain-of-custody maintained and documented, who is responsible for this, what are the repercussions if something goes awry?
  • What happens if the hemp is seized during transport?
  • Who bears the risk of the USDA deciding not to approve the state’s hemp production plan?
  • Are there / should there be limitations on change of ownership during the duration of the contract?
  • Who bears the risk of complying with state record keeping requirements?
  • Who is responsible for testing of hemp for human consumption or hemp items for other industries and to what standards?
  • What happens if the state allows commercial cultivation before or without submitting a plan to the USDA?

As with anything cannabis related (hemp or marijuana), your generic form agreements are not going to fit the bill here. In fact, such agreements often do more harm than good. This means that the next step is integrating the above considerations into your APC along with other particulars using language the courts will enforce – should that be necessary.

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