Oregon to Crack Down on CBD-Infused Alcoholic Beverages

About a year ago, we were the first law firm to report on the legality of manufactured cannabidiol (“CBD”)-infused alcoholic beverages. Due to the growing popularity and mainstream nature of CBD-infused products, many alcohol beverage companies were surprised to read us conclude that blending CBD into their products was a risky business, even in hemp-friendly states like Oregon. Yet, last week, the Oregon Liquor Control Commission (“OLCC”) issued new guidelines that expressly state that:

[b]ased on federal law and regulations, alcohol manufacturers are prohibited by law from manufacturing alcoholic beverages which contain CBD.

In addition, the state agency announced it would begin cracking down on the sale of CBD-infused alcoholic beverages manufactured in the state starting February 2020.

As we previously explained, alcoholic beverages are regulated under federal and state law. Most states, including Oregon, mandate that manufacturers provide proof to their liquor control board that their product formula has received approval from the U.S. Alcohol and Tobacco and Trade Bureau (“TTB”).

Although the TTB oversees the regulation on alcoholic beverages, the agency works closely with the U.S. 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’s main function is to protect public health by ensuring that foods and drinks introduced into interstate commerce are safe.

As we have discussed at length since the enactment of the 2018 Farm Bill (e.g., here and here), any substance that is intentionally added to food, including drinks, is subject to FDA pre-market review and approval, unless the substance is generally recognized as safe (“GRAS”). Because the FDA has approved CBD as a drug ingredient in the treatment of epilepsy (Epidiolex), the cannabis compound cannot be also be used in and marketed as a food. As such, CBD has not been recognized as GRAS – except for three hemp seed ingredients that contain trace amounts of CBD. Therefore, the FDA treats CBD-infused alcoholic beverages as unsafe and unlawful under the FDCA.

Given its deference to FDA guidelines, it is no suprise that the TTB has refused to approve formulas of alcoholic beverages infused with CBD until the FDA designs a legal pathway for the sale and marketing of these products.

Therefore, no Oregon CBD-infused alcohol manufacturer could possibly show proof of TTB approval to the OLCC, which means none of the products manufactured and sold in Oregon are lawful.

This brings us back to the OLCC guidelines and letters issued to licensees. According to various media sources, the agency declared it was acting in response to health uncertainties as well as to bring its enforcement in line with state and federal laws. The OLCC further explained that according to the FDA, “many CBD products are untested and might actually pose a risk to human health.”

While the ban will be limited to manufactured products, the OLCC said it intends to also develop new regulations that would bar local bars and restaurants from mixing CBD into alcoholic drinks for on-premises consumption.

So whether you are an Oregon manufacturer or a bar/restaurant owner, you should steer clear of infusing your alcoholic concoctions with CBD as it is, and will soon become, an even more risky business. For more information on this issue, feel free to contact our Portland regulatory team.

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Hemp-CBD Across State Lines: Nebraska

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 cover Nebraska.

Just recently, on December 20, 2019, Nebraska submitted it’s hemp cultivation plan to USDA. Nebraska’s plan outlines how it will comply with the 2018 Farm Bill and the USDA’s interim rules for hemp cultivation by addressing how the Nebraska Department of Agriculture (“NDA”) will maintain relevant producer information, sample and test hemp, dispose of hemp, inspect hemp producers, collect information on harvests, comply with enforcement provisions, and will ensure that it has the resources and personnel to regulate hemp. Nebraska’s hemp plan follows Legislative Bill 657 (“LB 657“) (codified at NE St. § 2-501 et seq.), which Nebraska’s legislature passed last year to allow for hemp cultivation under state law.

Nebraska is in the process of obtaining approval from for hemp cultivation but questions remain as to the legality of Hemp-CBD products. Last year, on November 16, 2018, Nebraska’s Attorney General issued an Opinion on CBD stating that CBD products remained illegal, despite the then-pending 2018 Farm Bill. That opinion does not appear to have been updated or rescinded. LB 657, makes it legal “to possess, transport, sell, and purchase lawfully produced hemp products.” NE St. § 2-504. However, LB 657 does not define “hemp products” and LB 657’s stated purpose is to “[a]lign state law with federal law regarding the cultivation, handling, marketing, and processing of hemp and hemp products.” NE St. § 2-502. Given the FDA’s policy on Hemp-CBD this makes the legality of specific Hemp-CBD products in Nebraska questionable at best. In addition, Lincoln Police Chief Jeff Bliemeister recently warned retailers that the sale of CBD products is not clearly legal under LB 657 and that they “could jeopardize[e]” their business if they sold these products.

Nebraska is in the process of implementing LB 657 and obtaining approval from the USDA for its hemp plan. That will certainly provide clarity for the production of hemp but questions will likely remain un-answered as to the legality of Hemp-CBD products under Nebraska law. Hopefully, they are cleared up in the new year.

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

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Protecting Hemp-CBD Business Information

According to recent reports, the hemp-derived cannabidiol (“Hemp-CBD”) market is expected to grow by 700 percent by 2020 and grow to $2.1 billion by 2020. Given this significant growth forecast, sensitive business information (also known as trade secrets) has become an incredibly valuable asset for Hemp-CBD stakeholders. Realizing value from those trade secrets requires sharing them with business partners and employees. Therefore, it isn’t surprising that in the past few months our firm has drafted numerous confidentiality agreements, also known as non-disclosure agreements (“NDA”), to protect our Hemp-CBD clients’ trade secrets. This post provides an brief overview of what an NDA is and which provisions makes it a well-drafted agreement.

WHAT IS AN NDA?

An NDA is a contract in which the person receiving the sensitive information (“Receiving Party”), usually a business partners, an employee, or a customer, agrees not to share that information with any other party without the prior written approval of the owner of this information (“Disclosing Party”).

Most states, including Oregon, have adopted a version of the Uniform Trade Secrets Act (“UTSA”). Under Oregon law, a trade secret is defined as

information, including a drawing, cost data, customer list, formula, pattern, compilation, program, device, method, technique or process that:
(a) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and
(b) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”

This means that to be legally protected, business information must be valuable and its owner must take reasonable steps to keep it secret. For example, informing new employees that confidential information will be shared in the course of their employment, specifically when requiring them to execute an NDA, should prove that reasonable efforts were made.

In addition, NDAs are enforceable provided they are “fair,” meaning the NDA is not overly restrictive or unduly burdensome on the Receiving Party.

WHAT PROVISIONS SHOULD BE IN AN NDA?

Whether an NDA is needed for business or employment purposes, an effective NDA should include the following provisions:

  1. A clear definition of the confidential information that will be shared with the Receiving Party during the term of the agreement. Depending on the state law that governs the NDA, an overly broad definition could expose the Disclosing Party to legal actions and render the NDA unenforceable.
  2. The reasons for which the sensitive information is shared with the Receiving Party.
  3. Terms under which the sensitive information may be disclosed. Generally, confidential information may be disclosed to a third-party on a need-to-know basis, such as when required by law.
  4. The consequences for disclosing the confidential information, which usually include large monetary fines and a court order preventing the breaching party from continuing to disclose the protected confidential information.
  5. The length of time during which the Receiving Party must retain the information confidential. Ideally, the Receiving Party will be required to maintain the confidential information secret after their employment agreement terminates.

NDAs are a relatively inexpensive investment for companies given the protection they afford over valuable business information. Accordingly, any business, particularly those engaged in growing markets like Hemp-CBD, should consult with experienced business attorneys to help them prepare sound NDAs.

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Hemp-CBD Across State Lines: Montana

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 Montana.

When it comes to Hemp CBD, there’s not a ton of guidance in Montana. Like many other states, Montana has not adopted a regulatory framework for the sale of Hemp CBD . What we do know is that the Montana Department of Public Health and Human Services (“DPHHS“) has adopted the federal Food and Drug Administration’s position on the unlawful sale of CBD-infused food and dietary supplements. The DPHHS policy is also a bit vague when it comes to manufacturing hemp products in Montana, referring companies to the FDA. This does not offer much guidance for Montana Hemp CBD companies who wish to make non-ingestible products, such as Hemp CBD topicals.

That said, the DPHHS policy really only tracks the FDA’s policy and even notes that “CBD products marketed not as food and do not make any health or health-related claims, should not be considered a workload obligation for the local health authority for possible enforcement action”. In other words, the policy recommends that only items marketed as foods and/or that make health claims should be the subject of local scrutiny. It does not take off the table the possibility that other products (like cosmetics) could be barred, but it certainly makes clear that it’s not a priority.

The cultivation of hemp is lawful and regulated in Montana. Cultivation and processing are overseen by the Montana Department of Agriculture (“MDA”). Draft sampling and testing regulations were published in August 2019 and the MDA indicated that hemp sampling is now underway in Montana.

Interestingly, MDA publishes guidance for hemp processors, which says: ” The processor license allows licensees to produce derivatives that may be included in products for food, fiber, oils, supplements or drugs (excluding THC) for the wholesale or ingredient market.” It may seem like MDA didn’t get DPHHS’ memo, but MDA goes on to note: “Hemp processors must comply with city, county, and tribal ordinances and laws. The approval of manufactured hemp derived products at the retail level continue to be subject to the laws and regulations of the United States Food and Drug Association (FDA) and the Montana Department of Public Health and Human Services (DPHHS).”

At the end of the day, this means that hemp processors will still need to follow DPHHS’ (and by extension, the FDA’s) policies when processing hemp. But this isn’t terribly clear from the hemp processor application itself, which notes that hemp can be used to make foods. This may be a reference to hemp seed oils, which are allowed in Montana and under FDA policies, but that may not be known to many people who are applying to process hemp in Montana.

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Oregon Welcomes Chinese Hemp Researchers: That’s Good and Bad for International Hemp Business

If you are an eccentric person like me and follow the Oregon Department of Agriculture (“ODA”) on Twitter and have a deep interest in international business (especially the trade war with China), you will have noticed that ODA recently (and proudly) posted something that I see as both positive and negative for the hemp industry:

ODA’s #Cannabis Policy Coordinator, Sunny Summers & @OSUAgSci meet with researchers from China’s Heilongjiang Academy of Agricultural Sciences Institute of Industrial Crops to talk about how Oregon can ship #hemp to #China! #WhatWeDo #AgIsCool #TuesdayThoughts #trade #agriculture

When I saw this, I cringed a bit, even though the benefits to Oregon and the U.S. are clear:

  1. Oregon marijuana farmers who recently produced a 2x surplus of marijuana can switch to growing hemp for export markets, as long as Oregon hemp farmers can grow hemp strains that fit the definition of hemp under the newly released USDA interim final rules;
  2. other U.S. states with hemp surpluses will be able to piggyback on Oregon’s engagement with international export markets because the coveted “grown in U.S.A.” brand strategy applies to Washington, California, and Kentucky hemp just as much as it applies to Oregon;
  3. disenfranchised farmers, especially those who have seen the demand for their tobacco crops diminish, can stay on the farm and keep the U.S. heartland throbbing with crops and cash (see here);
  4. exporting hemp means that the U.S. moves closer toward addressing our trade imbalance with the rest of the world, including China (the U.S. became a consistent net exporter of LNG (liquid natural gas) in 2018); and
  5. the U.S. can export its culture of quality and innovation in hemp to the rest of the world, which will continue to provide positive external benefits across many international industries and in our recently flagging international relations.

But there are potentially negative aspects of Oregon’s Department of Agriculture engaging with Chinese researchers. I raised my eyebrows at the ODA post because in addition to this blog, our firm publishes a sister blog, the China Law Blog, where we write on international business (especially China) and frequently warn our readers to protect their intellectual property all costs, whether you are at home or abroad.

If you follow our blog or keep up with international news, you know that researchers with Chinese ties who work in the U.S. are being scrutinized more closely. In the past, they have often been heavily involved in graduate programs where a lot of U.S. R&D occurs, and U.S. academic institutions are constantly wrestling with the dynamics of: potentially losing tuition dollars from fewer mainland Chinese students enrolling in the U.S.; losing grant dollars (both from the U.S. and Chinese governments, for very different reasons); losing prestige in the U.S. for engaging too much with China; losing prestige internationally for failing to hire capable researchers who publish influential scholarly works; monetizing R&D projects; and protecting intellectual property stemming from R&D projects.

Chinese academics’ largely unfettered, unmonitored, and unprecedented access to U.S. educational institutions has provided fertile ground for Chinese economic espionage. In short, whenever China is involved, you (I’m looking at you, ODA) need to keep your eyes open. China has a publicly acknowledged program of acquiring U.S. intellectual property any way it can (at least it is publicly acknowledged and documented by U.S. authorities – see here and here), and that includes by making relationship inroads with government contacts, trade groups, educational institutions, and directly with hemp farmers and businesses.

The geopolitical ramifications of engaging in international hemp business relationships are really inescapable, whether you are a hemp farmer who “only” sells to the local market, the ODA trying to promote Oregon hemp and hemp products, a hemp trade group, or a multinational corporation engaging in a sustained and well-planned M&A program to enhance your market share in the global hemp marketplace. China and the U.S. continue to be at loggerheads over many aspects of bilateral and international trade, but even with the trade war raging at the national level, U.S. and China subnational groups continue to engage with each other, working to establish and enhance relationships that can outlast or at least mitigate the effects of the trade war.

Ultimately, Oregon is simply doing what Utah did earlier this year when Utah welcomed over 85 Chinese government officials to discuss Utah-China business relations. With ODA, our advice remains unchanged: be on your guard where China is involved. Use whatever applicable cliché you have: trust but verify; speak softly and carry a big stick; keep your friends close and your enemies closer; or tread lightly on thin ice. And make sure that you clearly understand all of the potential angles your Chinese counterparts may be working. We will work to keep you in the know as U.S. businesses try to engage further with the international hemp community.

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Social Media Bans on CBD Ads Make No Sense

Last month, comedian Sacha Baron Cohen delivered a now widely shared keynote speech at an Anti Defamation League event in New York, in which he spared no harsh words for social media companies who he claims provide a platform for hate speech and the proliferation of fake news. In his speech, Cohen offered sharp criticisms for social media executives’ weak justifications for allowing this to occur, and offered suggestions on how to clean up the mess he claims they created. Cohen’s criticisms aren’t new: Facebook reportedly announced that it would not fact check political ads, and Twitter has reportedly not banned certain forms of hate speech because such bans would allegedly end up blocking some political accounts.

Given all of the misconduct that social media companies allegedly let fly under the radar (mostly on the excuse that doing anything about it would infringe free speech), it may shock many readers to learn where many social media companies actually draw a line in the sand: hemp-derived CBD advertisements.

For some reason, if you are a politician who wants to run attack ads on a competitor using completely fake information, you will probably be able to find some platform that allows you to do it, if you pay enough. But if you are a small business that sells a hemp CBD bath bomb, you run the risk of having your entire social media account deleted without any repercussion or remedy. This makes no sense.

Over the past few months, there have been many reports detailing how social media companies have banned user accounts for advertising CBD products (see here, for example). Many social media companies, like Facebook and Instagram (which is owned by Facebook), do not even have a public term and condition or policy that states that CBD advertisements are prohibited anywhere on their website. Apparently, Facebook’s bans have been justified by language on its website that says: “Ads must not promote the sale or use of unsafe supplements, as determined by Facebook in its sole discretion.” But right below that language, the policy lists a series of examples, and does not include CBD, which Facebook could easily include to promote transparency. Nevertheless, according to many articles published this year, many small businesses have lost their accounts for advertising CBD products.

Despite that Facebook doesn’t publish any terms or conditions relative to CBD, according to the Verge, Facebook’s ban is really meant to target ingestible products. According to Digiday, Facebook apparently won’t ban advertisements regarding topical hemp products. When the Digiday post came out, I attempted to verify whether Facebook had published any information that would give CBD advertisers guidance on what they can and cannot publish, but from what I can tell, the Facebook terms have not changed. All that we have are a few statements from various third-party journalists who are not affiliated with Facebook or other social media companies, and whose statements are not binding on the social media companies. Nothing is stopping Facebook from continuing to ban people who advertise any kind of CBD products.

For any small business that sells CBD products, reliance on these posts can be dangerous. Any small business owner knows that getting social media followers takes time, and often, lots of money. With the potential to have an account shut down, and to lose all the good will associated with that account, social media advertising can be a serious gamble for many businesses. There is no clear appeal right for these denials and the idea of taking a social media giant to court (or forced arbitration) is just unfathomable for almost any small business.

Of course, there are some exceptions to this rule. Twitter, for example, has express (though overly restrictive) rules regarding CBD advertising in the United States, which I’ve copied below:

We permit approved CBD topical advertisers to target the United States, subject to the following restrictions:

  • Advertisers must be licensed by the appropriate authorities and pre-authorized by Twitter
  • Advertisers may only promote non-ingestible, legally derived CBD topical products
  • Advertisers may only target jurisdictions in which they are licensed to promote these products or services online
  • Advertisers may not target Georgia, Idaho, Iowa, Mississippi, Missouri, Nebraska, Oklahoma, South Dakota, and Virginia
  • Advertisers are responsible for complying with all laws and regulations
  • Advertisers may not target users under the age of 21
  • Contact Twitter if you are interested in this option.

There is no clear appeal right for these denials and the idea of taking a social media giant to court (or forced arbitration) is just unfathomable for almost any small business.These are extremely restrictive and paternalistic regulations. Ironically, Twitter’s advertising policy places more restrictions on CBD advertisers than many states do on CBD companies. These terms are so broad that it is likely that many companies currently advertising CBD on Twitter are not in compliance with them, and are therefore risking their accounts.

All of this is compounded by the fact that many CBD companies may not use their own accounts for CBD advertisements and instead use brand ambassadors or influencers to advertise for them. Earlier this year, I wrote about many of the dangers that can come with using social media influencers to advertise cannabis products, but a lot of those risks are the same for hemp-derived CBD advertisements. There are strict Federal Trade Commission (“FTC”) guidelines covering what endorsers can and can’t say and requiring them to disclose the fact that they are paid for their endorsements in the advertisements, which raise three distinct problems for CBD companies.

First, brand ambassadors or influencers can’t do things that an actual CBD company can’t do. The FTC has played a fairly active role in sending warning letters with the Food and Drug Administration (“FDA”) to companies that the two agencies believe are engaged in unlawful advertising online. As the FTC recently told Vice, companies can be held accountable for any unsubstantiated claims made by influencers on the companies’ behalf (and obviously, so can the influencers). But when it comes to social media companies, it is irrelevant who is making a prohibited advertisement. Whoever violates a social media company’s policies (apparently even the undisclosed ones) risks being banned.

Second, if an influencer is banned after making claims paid for by a CBD company, this will likely lead to disputes. Like small businesses, influencers work very hard to build followers. If they lose accounts based on ads requested by companies, that is like losing business. They may sue the CBD companies for some kind of compensation. It is critical for CBD companies who are willing to risk advertising on social media to have actual contracts with their advertisers.

Finally, CBD companies cannot use influencers to hide the fact that they are advertising. I have heard many times that some social media companies won’t take action against people for just discussing CBD products (though I have never been able to verify that claim since social media companies generally do not publish anything in their terms and conditions on CBD). If that claim is true, it may seem advantageous to just pay an influencer to say things about a company’s CBD products that the company would be prohibited from advertising itself. This is flatly prohibited under FTC rules. Any paid relationship must be prominently disclosed. In fact, earlier this year, the FTC released guidelines for social media influencers to help them make the proper disclosures. This follows on the heels of earlier FTC guidance that is highly particularized, for example:

“When people view Instagram streams on most smartphones, longer descriptions (currently more than two lines) are truncated, with only the beginning lines displayed. To see the rest, you have to click ‘more.’ If an Instagram post makes an endorsement through the picture or the beginning lines of the description, any required disclosure should be presented without having to click ‘more.’”

The point is, there is no hiding the ball when it comes to influencer advertising. Companies have to be honest, and this can lead to trouble for them if they don’t follow the rules.

One area where there are actually clear rules is cannabis. Facebook and Instagram, for example, ban cannabis advertisements. These bans actually make sense given that federal law still prohibits cannabis, and because the bans are actually published on viewable terms and conditions for people to comply with.

Social media companies have largely remained outside the scope of federal regulations to date, though that may change in the future. From their standpoint, it makes sense to ban a product that is still classified as a Schedule I narcotic. But hemp-derived CBD is not a Schedule I narcotic. The only real federal policy on point is the policy of the FDA, which only claims that a few classes of CBD goods are prohibited.

Notwithstanding that the FDA has publicly acknowledged that there may be a regulatory pathway to marketing certain products containing Hemp CBD, such as cosmetics, some social media companies have apparently taken it upon themselves to step into the shoes of regulators and ban all kinds of hemp-derived CBD products. Though that has allegedly changed recently, as noted above, many social media companies have yet to publish formal guidance here, though they certainly can. One thing is clear, unfortunately: those whose accounts were banned may never get them back, even if social media companies do change their positions.

My advice to social media companies is to make a choice: step out of the shoes of the government and let people advertise products that are not unlawful, or ban whatever you decide to ban but make clear what the rules are.

The point of all of this is that when it comes to CBD advertising, things are very unclear. Social media companies are apparently dead set on allowing all kinds of posts and advertisements that many people find reprehensible. But when it comes to advertising CBD bath bombs, you better be prepared to bet your business’ account.

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Hemp-CBD, Oregon and the Unlawful Trade Practices Act

This is the first in a three-part series addressing why companies making and sell hemp-derived CBD products ought to be concerned about state consumer protection laws and offering a few thoughts on how to mitigate the risk of running afoul of those laws. This week we will look at Oregon, followed by Washington, and California. Please note that these laws are complex, so this is just a broad overview.

Increasingly, makers of CBD products are finding themselves on the wrong side of federal regulators and named as defendants in multi-million-dollar lawsuits. We’ve written extensively about warning letters issued by the Food and Drug Administration (FDA) to businesses selling hemp-derived CBD products as unapproved drugs:

And we’ve written about, and forecasted, significant litigation involving hemp-derived CBD:

Recently, Alison Malsbury wrote about a new a class action lawsuit against Charlotte’s Web and Infinite Product Co., alleging the former improperly marketing its CBD products as dietary supplements and the latter made unsubstantiated therapeutic claims about CBD. Alison points out that this and other lawsuits should come as no surprise, and she shares some startling statistics about the trustworthiness of CBD labeling. Notably the Charlotte’s Web lawsuit (and others) include claims brought under state consumer protection laws. So let’s take a look at Oregon:

What is the Unlawful Trade Practices Act (UTPA)?

The UTPA is designed to protect consumers from certain business practices. See O.R.S. §§ 646.605-646.656. The UTPA is a potent weapon against consumer fraud and in the hands of a skilled plaintiff’s attorney, one with potentially devastating consequences for your hemp-derived CBD business.

Generally the UTPA provides that a person engages in unlawful trade practices, if, in the course of business, the person: (1) employs any “unconscionable tactic” when selling, renting, or disposing of real estate, goods, or services; or (2) fails to deliver any or all of the portion of real estate, goods or services as promised, and at a customer’s request , refuses to refund money to the consumer for undelivered goods.

The UTPA enumerates 72 specific unlawful business practices. Here are a few that may lend themselves to a lawsuit against company selling CBD products:

  • knowingly taking advantage of a customer’s physical infirmity, ignorance, or illiteracy;
  • knowingly permitting a customer to enter into a transaction from which the customer will derive no material benefit;
  • causing confusion or misunderstanding on the source, approval, affiliations, or ties of a particular good, or service;
  • advertising real estate, goods, or services with the intent to not provide the items advertised;
  • misrepresenting the characteristics, ingredients, uses, benefits, quantities, or qualities of real estate, goods, or services;
  • making false or misleading representations of fact about the real estate, goods, or services of the customer or another;

The UTPA pleading and proof requirements are not as stringent as common-law fraud and, as a consumer protection statute, the UTPA is to be interpreted liberally in favor of consumers. For example, the Oregon Supreme Court has held with respect to whether the defendant acted “willfully” that “‘no more than proof of ordinary negligence by a defendant in not knowing, when it should have known, that a representation made by him was not true.” This is not a tough standard to meet: After all, shouldn’t a company selling hemp-derived CBD know how much CBD is in its product?

What are the significant risks for violating of the UTPA?

There are three significant litigation risks. The first is that the Oregon Attorney General (or District Attorney) commences a proceeding against your company as recently happened with the maker of 5-Hour Energy drinks. Such an action may commence with the Oregon DOJ Civil Enforcement Division issuing your company a letter seeking to resolve the letter. The prosecuting attorney may issue investigative demands, require the production of documents or require that you answer interrogatories. Before filing suit suit, the Oregon DOJ will advise you of the problem and give you an opportunity to enter into an Assurance of Voluntary Compliance (AVC). An AVC requires you to stop the unlawful practice and promise not to engage in the conduct in the future. An AVC is similar to a consent decree, and breach of an AVC is considered contempt of court. (Not something to take lightly.)

The second risk is a lawsuit by a consumer. Although these actions have some limitations as compared to actions by the Attorney General, the key risk is that the consumer may recover her attorneys’ fees along with actual damages or $200, whichever is greater. Although the law also permits punitive damages in limited circumstances, the attorneys’ fees provision is the most worrisome. That part of the UTPA may turn lawsuit where the actual damages are perhaps $100 (e.g. the price of the product) into one in which the consumer’s attorney seeks thousands or tens of thousands of dollars from your CBD business.

A third significant risk is UTPA lawsuits may be brought as class actions. Suppose a small Oregon-based CBD topical company sells its hemp-derived CBD product for $100 and sold 1,000 units in the last year and that the product labels violate the UTPA in some way. A plaintiff’s class action lawyer may commence a lawsuit seeking to recover $200,000 ($200 x 1,000) plus attorneys’ fees. Those fees may easily reach or exceed the actual or statutory damages and will become part of any settlement discussion. The potential liability can skyrocket if the CBD business sells 10,000 units ($2 million + attorneys’ fees) or 100,000 units ($20 million + attorneys’ fees). By way of comparison, the class action lawsuit against Infinite Product Co. alleges damages exceeding $5 million and asks for attorneys’ fees.

What may I do to mitigate risks of running afoul of Oregon’s Unlawful Trade Practices Act?

The most obvious way is to ensure that your hemp-CBD product is what it says it is and that you do not over-promise. (See above links re FDA and other litigation). Notably, the UTPA does not apply to conduct in compliance with the orders or rules of, a statute administered by a federal, state, or local government agency. So pay close attention to any action by the FDA regarding CBD, which of course you can read about here. And when it comes to ensuring your product “is what it says it is,” consider making use of additional and regular testing of your product and constituent materials provided by suppliers. If your company is contracting with a third-party to provide manufacturing or packaging services or crude or distillate, consider how may contract to shift or alleviate risks through reps and warranties clauses and indemnity provisions. Please reach out to one of our cannabis attorneys if you have further questions.

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Charlotte’s Web Faces Class Action Lawsuit for Improperly Marketing CBD Products

We’ve written extensively about hemp-derived CBD and the myriad issues faced by manufacturers CBD edibles. You can read more about this topic here:

And now, adding to the regulatory woes faced by many CBD companies, Charlotte’s Web Holdings Inc. and Infinite Product Co. have both been served with consumer class suits in California alleging that the products made by both companies violate FDA regulations and therefore violate California state law.

According to allegations, the Charlotte’s Web CBD products are labeled as dietary supplements, which according to the U.S. Food and Drug Administration (FDA), is not allowed:

Based on available evidence, FDA has concluded that THC and CBD products are excluded from the dietary supplement definition under section 201(ff)(3)(B) of the FD&C Act [21 U.S.C. § 321(ff)(3)(B)]. Under that provision, if a substance (such as THC or CBD) is an active ingredient in a drug product that has been approved under section 505 of the FD&C Act [21 U.S.C. § 355], or has been authorized for investigation as a new drug for which substantial clinical investigations have been instituted and for which the existence of such investigations has been made public, then products containing that substance are excluded from the definition of a dietary supplement.”

The FDA, as we have covered before, has explicitly stated that it is not legal to sell a food (including any animal food or feed) in interstate commerce to which THC or CBD has been added.

The lawsuit against Infinite Product Co. is slightly different, in that it targets products sold by the company included marketing statements that “CBD can alleviate some symptoms of autism, that cannabinoids have been found to inhibit the growth of cancer cells, and that, because of opiods’ addictiveness and painful withdrawal symptoms, people have moved to using CBD.”

The FDA has issued multiple statements that “[s]elling unapproved products with unsubstantiated therapeutic claims – such as claims that CBD products can treat serious diseases and conditions – can put patients and consumers at risk by leading them to put off important medical care,” and observed that “[t]he FDA has previously sent warning letters to other companies illegally selling CBD products that claimed to prevent, diagnose, treat, or cure serious diseases, such as cancer. Some of these products were in further violation of the Federal Food, Drug and Cosmetic Act because they were marketed as dietary supplements or because they involved the addition of CBD to food.”

Both causes of action in this case include allegations of violations of California Unfair Competition Law, California False Advertising Laws, California Consumer Legal Remedies Act, Breach of express and implied warranties, and the state’s Declaratory Judgment Act.

What is truly unfortunate is that these lawsuits come as no surprise. It has been widely acknowledged that there is no uniform regulatory framework in place to ensure that consumers of CBD products are actually consuming what they think. Leafly recently published a report showing that while most of the 47 CBD products they purchased and tested contained some CBD, most products did not contain the amount of CBD promised on the label. Leafly’s data broke down as follows:

  • 51% of products (24 of 47) delivered the promised CBD within 20% of the labeled dosage;
  • 23% of products (11 of 47) delivered some CBD, but less than 80% of the dosage promised on the label;
  • 15% of products (7 of 47) delivered more than 120% of the promised CBD; and
  • 11% of products (5 of 47) delivered no CBD whatsoever.

These results should be extremely concerning both to consumers, who may lack confidence about the nature of the products they’re purchasing, and to suppliers, who are opening themselves up to product liability lawsuits like those filed against Charlotte’s Web Holdings and Infinite Product. We expect that this is only the beginning of the lawsuits to come against CBD companies, and recommend that operators in this space talk to their attorneys about labeling, marketing, and advertising practices before becoming the next target.

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Hemp-CBD Across State Lines: Missouri

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 Missouri.

On June 1, 2018, Missouri passed House Bill 2034 (“HB 2034”), which has been codified, in part, at MO. St. 195.010, and legalized the cultivation of industrial hemp. Industrial hemp include “industrial hemp commodities and products and topical or ingestible animal and consumer products derived from industrial hemp with a delta-9 tetrahydrocannabinol concentration of not more than three-tenths of one percent on a dry weight basis[.]”

The program became effective on August 28, 2018 and is overseen by the Missouri Department of Agriculture (“MDA”). The MDA published proposed rules, which it recently amended, to align with the USDA hemp interim rules published on October 31, 2019. Accordingly, the MDA has yet to issue licenses under the program.

Although the MDA regulates the cultivation of hemp, the agency does not oversee the production of Hemp-CBD products, including Hemp-CBD foods and beverages. This task seems to fall under the Department of Health’s authority. Missouri law provides that “[a] food shall not be considered adulterated solely for containing industrial hemp, or an industrial hemp commodity or product.” Nevertheless, the state seems to defer to FDA regulations when providing additional resources on hemp and hemp products. The manufacture, distribution and sale of other Hemp-CBD products, including smokable products and cosmetics, is not apparently authorized nor restricted under Missouri law, meaning these products are probably lawful but remain unregulated at the moment.

Despite the enactment of HB 2034, some confusion remains regarding whether it is lawful to sell and possess hemp extracts, including Hemp-CBD oil, in the state. As part of a limited medical cannabis program, Missouri regulates the use of hemp extracts, which are defined as extracts from cannabis plant material that have less than 0.3% THC and at least 5% CBD by weight and contain no other psychoactive substances. Since 2014, access to hemp extracts has been limited to patients suffering from intractable epilepsy that are registered with the Missouri Department of Health. HB 2034 expanded who may legally possess Hemp-CBD, as the bill does not include possession limits. Yet, the Department of Revenues recently reached out to the state’s Attorney General’s office to clarify this issue, asking whether the department could issue sales tax licenses to businesses selling Hemp-CBD. Unfortunately, both the Attorney General’s Office and the Department of Revenue decided not to make the opinion public. This, local reporting explained, led to “a type of don’t-ask-don’t-tell policy, creating an environment in which businesses selling CBD oil can get a sales tax license as long as they don’t say they are selling it.”

Therefore, for the time being, the sale of Hemp-CBD products is unregulated, creating potential liability risks for sellers in the states.

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

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Your Hemp Questions Answered (Part 2)

Last month, Daniel Shortt 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, Daniel and I will respond to a number of those questions. In the first part [ONCE FIRST POST IS PUBLISHED, ADD LINK], Daniel focused on licensing and transportation questions. Today, I will focus on questions related to THC testing.

TESTING

Has the USDA provided any list of seeds that have satisfied total THC testing?

No. Although certain states have identified hemp seed that would work well in their specific geographical areas, the USDA has decided not to include a seed certification program in the rules. The agency explained its decision as follows: (1) the same seeds grown in different geographical locations and growing conditions can react differently; (2) the technology necessary to determine seed planting results in different locations is not currently advanced enough to make a seed certification scheme feasible; and (3) the agency does not have accurate data on the origin of most hemp seed planted in the U.S.

Are you going to address the 15 days to finish harvest rule? It means that if the lab is backed up with tests, it’s possible harvest would have to commence and possibly finish before results are received?

Requiring that growers test hemp plants within 15 days of the anticipated harvest may be an impossible obstacle for growers to overcome because it would not provide enough time for growers to sample, test, submit testing and receive a response before harvest, especially if there will be a limited numbers of testing labs. This is one of the issues that Senators Wyden and Merkley commented on in a letter to the USDA. We strongly suggest you share your thoughts as well on this matter.

How do the testing rules relate to hemp biomass?

The USDA testing rules do not address the testing of hemp biomass. Instead, the rules only provide for the pre-harvest testing of hemp. The testing of hemp biomass may be addressed under state rules. Note, however, that states like Oregon only impose THC testing requirements on pre-harvest and finished products intended to be sold to end-use consumers and are not providing guidance on the testing of hemp biomass.

Must labs be 17025 certified? Is there a grace period to get certified?

The USDA rules provide that it is considering establishing a fee-for-service hemp laboratory approval process for labs that wish to offer THC testing services. These USDA-approved labs would need to comply with the USDA’s ‘‘Laboratory Approval Program” requirements, which mandate that labs be ISO 17025 accredited. Alternatively, the agency is contemplating requiring all labs testing hemp to have ISO 17025 accreditation. Accordingly, because the USDA is only considering an ISO accreditation, it is unclear whether a grace period would apply. This is likely an issue that the agency would clarify if it were to adopt an accreditation process.

Is there any language on R&D allowances? For example, having R&D fields separate from production fields.

No, the rules do not address this issue.

Please explain in more detail the concept of delta 9 and total THC testing.

We have written on this issue and would suggest reading this post.

Regarding the switch to total THC by the ODA – has their plan been approved by the USDA yet? If not, then how important is it to follow their rules to a t?

As the 2018 Farm Bill states, and as the USDA rules reiterate, the 2014 Farm Bill will remain in effect until October 31, 2020. Moreover, until the USDA approves a state’s plan, in this case Oregon’s, the current Oregon Department of Agriculture (“ODA”) rules are the only requirements with which registered growers and processors must comply. Therefore, it is crucial for ODA registrants to follow these rules particularly until the USDA approves the ODA’s plan under the 2018 Farm Bill. Moreover, it is important to remember that the USDA rules only set a floor for state plans, which means that states are free to set more stringent standards for the production of hemp.

Can you get a recreational marijuana license and hemp license and just cover yourself that way if your crop test “HOT”?

The short answer is no. Although states like Oregon allow the same entity to hold an ODA registration and an Oregon Liquor Control Commission (“OLCC”) recreational marijuana license, both agencies require that the hemp and marijuana handled by the registrant/licensee be kept separate. Therefore, an ODA registrant could not simply transfer its “hot hemp” to its marijuana business to avoid liabilities under the ODA testing rules.

Will hemp processing facilities (extraction) be required to have a DEA registration?

The USDA rules do not address the processing of hemp. The oversight of hemp processing will fall on the state’s shoulders (departments of agriculture or departments of health, most likely). Therefore, it is unclear at this time whether states will mandate that processing facilities be DEA registered.

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Your Hemp Webinar Questions Answered (Part 1)

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.

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Federal Agencies Provide New Guidance for Hemp Banking

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.

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