Hemp-CBD Across State Lines: California

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 will summarize a new state in alphabetical order. So far, we have covered Alabama, Alaska, Arizona and Arkansas. This week we turn to California.

I personally think that it’s a bit difficult to talk about Hemp-CBD in a vacuum in California, because the laws we have here are much more focused on the actual hemp plant itself. So today, I’m going to talk not only about Hemp-CBD, but also about laws on cultivation and processing.

Hemp Cultivation

Of all the things you can do with hemp in California, cultivation is probably the safest and most “legalized”. It’s had a relatively long and complex history in this state, beginning most significantly in 2013, when California passed Senate Bill 566, the California Industrial Hemp Farming Act (or “CIHFA”). The CIHFA amended CA law to redefine “marijuana” to exclude industrial hemp, and to define industrial hemp. It also added a section to the Food and Agriculture Code that would regulate the production of hemp by established agricultural research institutions (“EARIs”) and commercial cultivators. Even though there was a law allowing commercial cultivation, it didn’t actually take place until many years later.

The next year, the federal Agricultural Act of 2014 (or “2014 Farm Bill”) was passed. As readers of this blog probably know by now, section 7606 of the 2014 Farm Bill allowed the cultivation of hemp for research purposes conducted under an agricultural pilot program or by a research institution, in states where hemp cultivation was legal. California still hasn’t developed an agricultural pilot program, but according to FAQs issued by the California Department of Food and Agriculture (“CDFA”), the pilot program is in the works.

After the 2014 Farm Bill was passed, on June 6, 2014, then-California Attorney General (and current 2020 U.S. presidential runner) Kamala Harris issued opinion 13-1102, which stated “Federal law authorized, and rendered operative, the relevant portions of the California Industrial Hemp Farming Act on February 7, 2014.” Harris’ opinion, however, noted that provisions of the CIHFA were “inoperative to the extent that they apply or pertain to any form of industrial hemp cultivation not authorized by federal law.” In plain English, commercial cultivation was still not allowed.

In 2016, the Control Regulate and Tax Adult Use Of Marijuana Act (or “Prop. 64”) was passed. Prop. 64 formally amended the above California Food & Agriculture Code sections to make the hemp provisions become effective on January 1, 2017. But even that didn’t really happen.

In 2018, commercial cultivation began to become a reality with Senate Bill 1409. SB-1409 (which we have written about here, here, and here) allowed for the commercial cultivation of hemp upon registration with the CDFA and county commissioners, effective January 1, 2019. It was only on April 30, 2019, years after the CIHFA was passed, that the CDFA published information concerning registration with county agricultural commissioners to cultivate hemp.

To date, CDFA has created (1) regulations that deal with cultivation for commercial purposes; (2) regulations that list of approved seed cultivars; (3) emergency testing and sampling regulations; (4) guidelines for county agricultural commissioners to collect certain information from EARI cultivators; and (5) guidelines requiring certain hemp cultivators to obtain nursery stock licenses. More are likely to come, and soon.

What this all means is:

  • Pilot Program: We don’t have one here officially yet, but might soon.
  • EARIs: CIHFA basically allows EARIs to cultivate hemp with very few restrictions. There are still a lot of unanswered questions, like whether this hemp can be sold for commercial purposes.
  • Commercial Cultivation: Commercial hemp cultivators can pay a modest fee to cultivate hemp (provided their local jurisdiction allows it), and are subject to some testing and sampling, as well as other requirements. All in all, commercial cultivators are subject to DRASTICALLY fewer restrictions and regulations than commercial cannabis cultivators in CA (for the record, CA defines “Cannabis” here to exclude hemp, sorry for any confusion). However, because the 2018 Farm Bill hasn’t been fully implemented and the federal government is still relying on the 2014 Farm Bill, commercial cultivation is still in a gray area.

Being California, this is of course about to possibly change. The state is considering passing new legislation (SB-153) that would amend the hemp provisions of the Food and Agriculture Code to be more consistent with the 2014 and 2018 Farm Bills. I plan on writing more on SB-153 in the coming weeks, but for now, here are some highlights:

  • SB-153 would contain a new definition of “industrial hemp” that’s sort of different from CA’s current definition in the Health and Safety Code, meaning there will be two definitions of the term;
  • The definition of EARI would be restricted much, much further to apply to a much smaller subset of research institutions;
  • Permits would be required for all hemp cultivation—including non-commercial cultivation—meaning that some research institutions that currently qualify as EARIs will need to register and comply with CDFA regulations;
  • The CDFA will be forced to create and submit a hemp production program to submit to the U.S. Department of Agriculture per section 297B of the 2018 Farm Bill; and
  • People who provide false information on their commercial hemp registrations will be barred from participating in CA’s future hemp program.

This is just a brief overview and, again, I plan on writing in detail on SB-153 in the coming weeks. Needless to say, however, SB-153 would clarify a lot for hemp cultivators here given that the 2018 Farm Bill has yet to be implemented and, to date, there hasn’t been much action to get a California hemp production plan going.

Hemp Processing/Manufacture/Testing

The CDFA FAQs say all that needs to be said: “California law does not currently provide any requirements for the manufacturing, processing, or selling of non-food industrial hemp or hemp products.” That said, the California Department of Public Health’s (“CDPH”) Hemp CBD FAQs take the position that Hemp CBD is illegal in basically all foods, beverages, and some other products. Based on this position, the CDPH has apparently been going after manufacturers of Hemp CBD products on the grounds that Hemp CBD “adulterates” foods, under the California Sherman Food, Drug, & Cosmetic Law.

I recently wrote about a new law (AB-228) that if passed, would find conclusively that Hemp-CBD added to foods and other products does not in and of itself adulterate them. The law looks poised to pass, and if it does would do the following:

  • Licensed cannabis companies wouldn’t be precluded from being in the hemp business;
  • Hemp products that are foods, beverages, or cosmetics would have some minimal labeling requirements;
  • Food manufacturers that make hemp products would be required to obtain certain registrations and would need to demonstrate that their hemp comes from a jurisdiction that has an “established and approved industrial hemp program” that meets all federal requirements for the sale and cultivation of hemp;
  • The CDPH wouldn’t be able to conclude that foods, beverages, or cosmetics are adulterated just because they contain CBD; and
  • Raw hemp products would need to undergo certain lab testing and get certificates of analysis prior to sale.

Hemp-CBD Product Sales

The CDPH’s Hemp CBD FAQs prohibit the sale of Hemp CBD in foods and many other products as noted above. It’s less clear about certain products like flower, oil, and vape cartridges. But we do know what if AB-228 passes, Hemp CBD may be allowed in many kinds of products that the state has, for some reason, tried to ban.

In the near future, we may be dealing with a “legal” and regulated Hemp CBD market in California.

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Where Do Federal Agencies Stand on CBD?

In the past few weeks, many opinions on the sale, marketing and transportation of hemp and hemp-derived CBD-infused (“Hemp-CBD”) products have been released by federal agencies, including the U.S. Food and Drug Administration (“FDA”), the U.S. Department of Agriculture (“USDA”), the U.S. Postal Service (“USPS”), and the Transportation Security Administration (“TSA”). While we have written on these agency policies individually, we thought it would be helpful to recap these opinions under one blog post.

FOOD & DRUG ADMINISTRATION

Since the enactment of the 2018 Farm Bill, the FDA has expressly opined that the sale and marketing of CBD-infused food and dietary supplement in interstate commerce is unlawful because CBD has already been approved as a drug, and thus, cannot be concurrently sold or marketed as a food or dietary supplement. Nevertheless, the substantial public interest in accessing CBD in food and dietary supplements has forced the FDA to explore potential regulatory pathways for the lawful marketing of these products. On May 31, the agency held a public meeting that offered CBD stakeholders a platform to share feedback and experiences and provided the agency with information related to the cannabis-derived compound. In addition, the agency created a working group that is evaluating the regulatory frameworks for non-drug uses of CBD. The agency anticipates updating the public about its progress later this summer.

U.S. DEPARTMENT OF AGRICULTURE

On May 28, 2018, the USDA issued a non-binding opinion letter in which the agency explained, in part, that states and Native American tribes may not prohibit the interstate transportation or shipping of hemp or hemp products lawfully produced under the 2014 Farm Bill. Specifically, the USDA reasoned that state and tribe interference is prohibited pursuant to the 2018 Farm Bill, which provides that “[n]othing in this sections prohibits the production of hemp in a State or the territory of an Indian tribe, for which a state or Tribal plan is not approved under this section, if the production of hemp is in accordance with [. . .] other Federal laws [i.e., the 2014 Farm Bill]” (Emphasis added). Note that while the USDA letter is non-binding, this agency policy strongly supports the position that states and tribes should not interfere with lawfully grown and processed hemp shipments.

U.S. POSTAL SERVICE

In March the USPS released guidance on mailing Hemp-CBD products, which it clarified at the beginning of June. Pursuant to its most recent guidelines, the USPS authorizes the mailing of Hemp-CBD products so long as (1) the products contain no more than 0.3 percent THC; (2) the mailer complies with all applicable federal, state, and local laws that pertain to hemp production, processing, distribution and sale; and (3) the mailer retains records establishing compliance with such laws, for no less than 2 year after the date of mailing. The second prong suggests that mailing Hemp-CBD food and dietary supplement would not be lawfully mailable given that these products violate the Food, Drug, and Cosmetic Act (i.e., the laws enforced by the FDA); however, this issue has yet to be administratively litigated or clarified by the USPS.

TRANSPORTATION SECURITY ADMINISTRATION

Back in May, we wrote about the confusing guidelines issued by the TSA on traveling with CBD-infused products. Shortly after our post was published, the agency revised its website, which now provide that:

Marijuana and certain cannabis infused products, including some Cannabidiol (CBD) oil, remain illegal under federal law except for products that contain no more than 0.3 percent THC on a dry weight basis or that are approved by FDA. (See the Agriculture Improvement Act of 2018, Pub. L. 115-334.)” (Emphasis added).

On its face, this policy suggests that the TSA will authorize travelers to carry any CBD-infused product that meets the federal THC concentration limit of 0.3 percent, even if the product is deemed unlawful by the FDA. However, travelers should understand that traveling with these products remains risky for two reasons: (1) “[t]he final decision rests with the TSA officer on whether an item is allowed through the checkpoint”; and (2) if it unclear how TSA would test products to verify their THC content. As far as we know, the TSA’s testing procedure is solely geared towards determining whether THC is present, not to measure its exact concentration.

To conclude, while the USDA, the USPS, and the TSA have all released guidelines that seem to legalize the transportation and shipping of Hemp-CBD products, these policies are drafted too broadly to completely shield carriers, mailers and travelers from enforcement actions. We anticipate – and sincerely hope – that the transportation of these products will become clearer and easier once the FDA implements a regulatory framework for their sale and marketing.

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California is Poised to Pass a Landmark Hemp CBD Law

California is on the brink of legalizing hemp-derived cannabidiol (“Hemp CBD”) in many products—well, sort of. The law at issue is Assembly Bill 228 (“AB-228”), and I’ve been writing about it since it was introduced in January 2019 (for my posts on it, see here, here, and here). As of today, it’s made its way through the California Assembly and most of the way through the California Senate with very little resistance. AB-228 is likely to pass soon, and because it is what’s called an “urgency” statute, will become immediately effective.

Since I started writing about AB-228, the bill has morphed a lot, and now actually has some teeth. Even if it passes though, Hemp CBD may not be completely legal in the Golden State. Here’s a brief explanation of what’s happened, and what’s at stake.

About a year ago, the California Department of Public Health’s (“CDPH”) released its now-infamous Hemp CBD FAQs, which take the position that Hemp CBD is illegal in basically all foods, beverages, and some other products (but note, there is not a single law or regulation on the books anywhere in the state that takes this position). The FAQs “outlawed” Hemp CBD based on the federal Controlled Substances Act (which as of December 20, 2018 and the passage of the 2018 Farm Bill no longer hemp illegal) and the fact that the federal Food and Drug Administration (“FDA”) did not allow the addition of Hemp CBD to the same products that are mentioned in the FAQs. (For a discussion of the FDA’s policy memos which claim that Hemp CBD is illegal, see here and here).

While the FAQs didn’t really cite California law (except to define foods, etc.) as the basis for enforcement, it’s come to light that the CDPH has been relying on the California Sherman Food, Drug, & Cosmetic Law (not to be confused with the federal Sherman Act, an antitrust law), to pull Hemp CBD products from retail and wholesale operations. The CA Sherman Law gives the CDPH authority over foods and beverages and allows them to target products that it deems “adulterated”. In a sense, the CA Sherman Law is a lot like the federal Food, Drug and Cosmetic Act that the FDA gets its authority from (hence all of the citations to FDA policy).

Originally, AB-228 was very narrow and only would have created a law saying that the mere addition of Hemp CBD to foods and cosmetics did not adulterate them. Over the last few months, in various committees, more and more things have been piled onto the bill. Here are some of the highlights of the current version:

  • Licensed cannabis companies wouldn’t be precluded from being in the hemp business;
  • Hemp products that are foods, beverages, or cosmetics would have some minimal labeling requirements;
  • Food manufacturers that make hemp products would be required to obtain certain registrations and would need to demonstrate that their hemp comes from a jurisdiction that has an “established and approved industrial hemp program” that meets all federal requirements for the sale and cultivation of hemp;
  • The CDPH wouldn’t be able to conclude that foods, beverages, or cosmetics are adulterated just because they contain CBD; and
  • Raw hemp products would need to undergo certain lab testing and get certificates of analysis prior to sale.

It’s clear that if AB-228 becomes law, it will be a huge victory for the burgeoning hemp industry across the state. But there are a few key issues that may still not wipe out the gray areas:

  • AB-228 does not change federal law. The California legislature has no power to modify federal law or policy. The FDA’s policy memos are not affected by California law. If sellers sell Hemp CBD foods, they may still draw the ire of the FDA—which is more likely if medical claims are made.
  • AB-228 does not require the CDPH to ignore federal law. Remember that the CDPH FAQs cited the FDA’s position. It is theoretically possible that the CDPH could continue to uphold the FAQs unless and until the FDA changes its mind. I think this is unlikely to happen, but in the hemp world, sometimes anything is possible.
  • AB-228 does not take away all grounds for enforcement from CDPH. If AB-228 passes, the addition of Hemp CBD to foods and cosmetics alone doesn’t render them adulterated. But that’s just scratching the surface. Other things could render them adulterated. The CDPH can also go after “misbranded” foods and other products. And, of course, there are tons of other product specific laws (e.g., Prop. 65) that may create problems for sellers of CBD goods.

In spite of these issues, if AB-228 passes it’ll create a lot of certainty for hemp businesses in California, where there previously wasn’t much. We’ll stay tuned on updates to this law and how it will affect the hemp industry in California, and as a whole.

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Hemp-CBD Across State Lines: Arkansas

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 will summarize a new state in alphabetical order. So far, we have covered Alabama, Alaska and Arizona. This week we turn to Arkansas.

The Arizona State Plant Board (“ASPB”), which is part of the state Department of Agriculture, has been overseeing the state’s hemp program since August 2018.

The ASPB rules require a license to cultivate, process, distribute or market raw hemp and industrial hemp products. “Industrial hemp products” or “hemp products” means “products derived from, or made by, processing industrial hemp plants or plant parts, including without limitation: (A) Certified seed for cultivation if the seeds originate from industrial hemp varieties; (B) Cloth; (C) Cordage; (D) Fiber; (E) Food; (F) Fuel; (G) Paint; (H) Paper; (I) Particleboard; (J) Plastics; and (K) Seed, seed meal, and seed oil for consumption.”

The rules also provide for “publicly marketable hemp product” which is differentiated from “industrial hemp products” and refers to “a hemp product that meets one or more of the following descriptions:”

(a) the product does not include any living hemp plants, viable seeds, leaf materials, floral materials, or decarboxylated delta-9-THC content above 0.3 percent; and does include, without limitation, the following products: bare stalks, bast fiber, hurd fiber, nonviable roots, nonviable seeds, seed oils, and plant extracts (excluding products containing decarboxylated delta-9-THC above 0.3 percent).

(b) the product is CBD that was derived from industrial hemp, as defined in this regulation; or

(c) the product is CBD that is approved as a prescription medication by the United States Food and Drug Administration.”

Publicly marketable hemp products are excluded from the ASPB’s definition of “cannabis” as well as from the ASPB’s explanation of who must apply for a license to grow or process industrial hemp. Accordingly, no license or permit is required by the state agency to sell or deliver Hemp-CBD products in the state.

Moreover, on March 18, 2019, Arkansas removed Hemp-CBD that contains no more than 0.3 percent THC on a dry weight basis and that is not approved as a drug by the FDA from its list of controlled substances. In doing so, the state removed all criminal and civil penalties for possession hemp-derived CBD products in Arkansas, and thus, authorized the sale of these products regardless of continued federal prohibition.

Consequently, it is safe to say that Arkansas is one of the safest and most hemp-friendly states in the country.

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The FDA’s Problem With Hemp-CBD

People are distrustful.

In May 2019, Gallup pollsters asked Americans about their trust in federal agencies. The Food and Drug Administration (FDA) ranked near the bottom, beating only the Veterans Administration (VA) and the Environmental Protection Agency (EPA). Only 44% of respondents rated the FDA as doing an excellent or good job. In turn, 33% viewed the FDA’s performance as “fair” and 22% ranking the FDA as “poor.” That paled in comparison to the US Postal Service (74% good/excellent) and fell below even the Internal Revenue Service (IRS) (50% good/excellent). That’s not great for the FDA, considering that its purpose is to protect the public, not collect taxes.

While we’re on the subject of Gallup Polls, in June Gallup found that 4 in 10 respondents believed that CBD should be sold over the counter. Only 21% of respondents believed that CBD oil should be sold with a prescription and a mere 2% believed it should not be available at all. In addition, 36% of respondents were not familiar with CBD.

It’s no secret that CBD presents a unique challenge for the FDA because the compound itself is about as popular as the agency. To compare, 44% of Americans think the FDA is doing a good job and 39% of Americans believe that CBD should be available without a prescription. If the FDA and CBD oil were politicians, they’d be neck and neck. That begs the question, do Americans trust the FDA enough to evaluate CBD?

Recently, the FDA issued a new statement on CBD: FDA is Committed to Sound, Science-Based Policy on CBD. The opening paragraph of the statement is reassuring:

Science forms the basis for decisions at the [FDA] and is paramount when it comes to making decisions that will impact the health and safety of the American public. We apply this rigorous, science-based approach to matters large and small that come before the Agency — including with respect to products containing cannabis or cannabis-derived compounds, including cannabidiol (CBD).

That sounds great! Who doesn’t want a “sound, science-based policy on CBD?” Though evidence shows that CBD certainly has some serious benefits, we really do not know enough about the compound at this point. I think the FDA’s statement sums this up nicely:

While we recognize the potential benefits of CBD, questions remain regarding its safety. During our review of the marketing application for Epidiolex, we identified certain safety risks, including the potential for liver injury. Furthermore, unsubstantiated therapeutic claims — such as claims that CBD products can treat serious diseases — can lead consumers to put off getting important medical care.

Again, it’s pretty hard to argue that these items shouldn’t be investigated. The problem is that people may not trust the FDA with something as popular as public access to CBD oil.

How did the FDA lose the public’s trust? In 2013, the Journal of Law, Medicine, and Ethics published an article titled Institutional Corruption of Pharmaceuticals and the Myth of Safe and Effective Drugs which provides some potential answers. The article finds that the “pharmaceutical industry has corrupted the practice of medicine through its influence over what drugs are developed, how they are tested, and how medical knowledge is created.” The FDA was created to protect the public from unsafe food and drugs. However, the high cost of investigating and approving drugs has turned “drug companies into the FDA’s prime clients, deepening the regulatory and cultural capture of the agency.” The article determines that the FDA has put the needs of the medical industry over the needs of individuals which has resulted in an increase in the overall number of drugs, some of which are not effective or needed. In the last few years, the opioid crisis has made the situation even more pressing. The Center for Disease Control reported that “drug overdoses killed 63,632 Americans in 2016,” and “nearly two-thirds of these deaths (66%) involved a prescription or illicit opioid.”

The lack of public trust in the FDA helps inform the current problem it faces with CBD oil. On one hand, the FDA must ensure that products are safe for the public. On the other hand, it also needs to keep politicians (including Senators Ron Wyden and Mitch McConnell) and the public happy by allowing broad access to CBD oil. We’ll continue to monitor how the FDA regulates this tough issue.

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Hemp-CBD Across State Lines: Arizona

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 will summarize a new state in alphabetical order. So far, we have covered Alabama and Alaska. This week we turn to Arizona.

The Arizona Department of Agriculture (“AZDA”) oversees the state’s hemp program. The hemp program began in May 2018 when Senate Bill 108 was signed into law, which opened up hemp processing in the summer of 2019. It took the state a year so that it could develop the regulations and licensing program. As of now, the state’s opening up for license applications. Arizona’s hemp laws and regulations can be found here and here respectively.

Under Arizona law, growers (and nurseries), processors, harvesters, and transporters are required to obtain AZDA licenses, which AZDA publishes applications for here. The regulations also require researchers to obtain licensure. Notably, the AZDA doesn’t regulate retailers, which I’ll discuss some more below. Like in any other state with regulated hemp, there are fees, compliance rules, and penalties for non-compliance. But the level of regulation is not even close to what we see for cannabis/marijuana in many other states.

It’s important to consider that the 2018 Farm Bill hasn’t yet been fully implemented, meaning for the time being, the 2014 Farm Bill is still in play. Even though the 2014 Farm Bill doesn’t expressly allow for commercial activity, a number of states have broadly interpreted it to permit commercial activity. Arizona is allowing commercial activity for licensees of the AZDA—in addition to allowing research as noted above—but it doesn’t appear to have taken the position that commercial sales are authorized under the 2014 Farm Bill like other states. What this means is that under federal law, and until the 2018 Farm Bill is fully implemented, the state of the laws is murky.

One of the areas in which the law is murky is the sale of hemp products. There is currently no retail license type, and the hemp regulations state that it’s prohibited to “Offer for sale, trade, transfer possession of, gift, or otherwise relinquish possession of industrial hemp plants, plant parts, or hemp seed that is capable of germination to an unauthorized person”. However, a different section of the regulations states that processors can “sell, distribute, transfer, or gift any products processed from harvested hemp that are not” unauthorized. Read together, these sections only seem to bar the resale of plant parts and not all “Hemp products”, which are defined as “all products made from industrial hemp, including cloth, cordage, fiber, fuel, grain, paint, paper, construction materials, plastics and by-products derived from sterile hemp seed or hemp seed oil. Hemp products excludes any product made to be ingested except food made from sterile hemp seed or hemp seed oil.” While there aren’t specific retail license types, the state may be okay with limited sales of hemp products.

In terms of what those hemp products are, the AZDA itself doesn’t regulate the production of products made from hemp according to the following statement from these FAQs on its website:

Q: Will I be able to manufacture “CBD” products from industrial hemp?
A: Yes, however the Program oversight only extends from the growth and cultivation of industrial hemp, up to the point of processing. For licensed processors, the Program will focus on ensuring they receive raw material that is below 0.3% THC. If there are food handling laws, laws and regulations under the oversight of the Food and Drug Administration, or other laws related to industrial hemp of another agency, then those issues are out of the Department’s scope of regulatory oversight.

In other words, the AZDA doesn’t have oversight over certain products, but that’s not to say that other authorities don’t.

Another important nuance of the regulations is that they state that “No unauthorized person shall . . . transport, import or process industrial hemp”. It’s not yet clear what the effect of this provision will be on interstate shipments of hemp or hemp products. The 2018 Farm Bill states that individual states can’t block shipments through their borders, but (a) that law hasn’t taken effect yet, and (b) Arizona is free to stop shipments of out-of-state hemp into Arizona. So in the end, the state may just be closing off its borders to out-of-state products.

There are not a great deal of restrictions on personal use. The AZDA notes in the FAQ that people aren’t allowed to grow hemp for personal use. When it comes to marijuana, the state has a medical marijuana program which is subject to much different regulations.

Arizona’s hemp laws are still in their infancy. That’s all likely to change as the federal government implements the 2018 Farm Bill and the FDA (hopefully) comes out with CBD regulations. Stay tuned to the Canna Law Blog for any further developments with Arizona CBD and hemp laws.

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Oregon Hemp-CBD Litigation: Another Tale on the Importance of Due Diligence Before Contracting

Most of the hemp litigation we’ve written about has concerned a hemp purchaser suing a hemp farmer. This week concerns a $2.5 million lawsuit recently filed in Oregon wherein a hemp farmer sued a CBD processor.

The plaintiff, JNV Farms, alleges that in the fall of 2018 it entered into a manufacturing agreement with one of the defendants, C&N Ag LLC (“C&N”), by which JNV Farms was to provide industrial hemp to C&N who was to process the hemp into CBD Isolate and market and sell the finished product. The complaint alleges that profits were to be split 50/50.

According to the complaint, JNV Farms provided the defendants 13,800 lbs of biomass in December 2018. The defendants represented they were testing and preparing to process the material. After JNV Farms made repeated inquiries, defendants became less communicative then eventually refused to respond at all, and refused to meet with JNV Farms or permit inspection of the hemp or finished product.

JNV Farms claimed the defendants (i) neglected or refused to complete the work contemplated by the contract, (ii) failed to return the industrial hemp, (iii) failed and refused to compensate JNV Farms for the hemp, and (iv) failed to provide JNV Farms any of the CBD Isolate or the share of revenue from its sale. JNV Farms alleged claims for breach of contract, breach of the covenant of good faith and fair dealing, unjust enrichment, conversion, and fraud.

Finally – and not insignificantly – the complaint seeks to pierce the corporate veil and to hold the two owners of C&N, defendants Mock and Eastburn, personally responsible for the liabilities of C&N. This claim, perhaps more than the others, may strike fear into the defendants. As every business owner knows (or should know) a key purpose of incorporation is to shield company assets from being used to satisfy company obligations. The goal of a veil-piercing claim is to reach past the corporate shield and into the pockets of owners or investors.

Piercing the corporate veil is difficult. As it should be. But the complaint appears to allege facts sufficient to withstand a motion to dismiss. Notably the complaint alleges that when Mock and Eastburn negotiated the contract, and as of the date it was executed, that C&N was not yet in existence because no paperwork had yet been filed with the Oregon Secretary of State. This fact, if true, is not necessarily dispositive. (Indeed, if there was no corporation there is no need to pierce the corporate veil). But no one entering million-dollar contracts (Mock and Eastburn) ought to do so without having completed the necessary steps to form an entity. On the flip side, JNV Farms likely could have done a better job protecting its investment and the lawsuit may, as it often does, come down to whether the defendants have any recoverable assets. Time will tell.

For more on the recent wave of Oregon hemp litigation, check out the following:

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Hemp-CBD Across State Lines: Alaska

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 will summarize a new state in alphabetical order. Last week was Alabama. This week we turn to Alaska.

In April 2018, Alaska enacted Senate Bill 6 (SB 6), “An Act Relating to the Regulation and Production of Industrial Hemp.” SB 6 was passed before the 2018 Farm Bill, in compliance with the 2014 Farm Bill. Under SB 6, “industrial hemp” is defined as “all parts and varieties of the plant Cannabis sativa L. containing not more than 0.3 percent delta-9-tetrahydrocannabinol.” SB 6 defines “cannabidiol” oil as the “viscous liquid concentrate of cannabidiol extracted from the plant (genus) Cannabis containing not more than 0.3 percent delta-9-tetrahydrocannabinol.” SB 6 does not address the processing of industrial hemp into Hemp-CBD products

The Alaska Department of Natural Resources (“DNR”), which is a part of the Alaska Division of Agriculture, has regulatory authority over industrial hemp. According to the Alaska Journal, Alaska’s hemp program has been off to a slow start as DNR took time to work with law enforcement to come up with a regulatory plan for hemp.

On May 31, 2019, DNR issued proposed industrial hemp rules. These rules are extremely detailed and are not yet final. This post will summarize some of the highlights including cultivation, processing, sales, and hemp-derived products. The proposed rules also provide a detailed outline of industrial hemp transportation and testing, including procedures for quarantining and destroying non-compliant hemp and hemp products.

Under proposed rules, DNR will issue three “classes of industrial hemp registration for participation in the [Alaska Industrial Hemp Pilot Program],” for growers, processors and retailers.

Grower registration. A registered grower may grow, store, and transport industrial hemp. A grower may also sell raw industrial hemp to another grower or to a processor or sell industrial hemp “to persons who are not required to be registered by this chapter, including consumers in the state, if the hemp will not be further processed[.]” A grower cannot sell industrial hemp that has been processed unless it holds a processor registration as well. Growers must retain records of the source of all industrial hemp seeds and propagules. Industrial hemp cultivation is only allowed in a registered “grow area,” which cannot be a residence and cannot be within 3,230 feet of a marijuana grow. Growers must submit planting report to DNR 30 days after planting or replanting hemp seeds and propagules. Pesticides are only to be applied by an Alaska Department of Environmental Conservation certified applicator. Growers cannot harvest hemp until it has been tested by DNR unless DNR gives express permission allowing a post-harvest test. In either scenario, industrial hemp must be tested before a grower may sell it.

Processor registration. A registered processor may process industrial hemp in its raw form into any other form or product. Processors may purchase, store, and transport raw hemp. Processors may sell processed hemp or hemp products to retailers. Processors must comply with all applicable health and safety standards. Processors may only create hemp-based extracts using the following methods:

  • Non-hydrocarbon extractions, including: cold or hot potable water filtration; isopropyl alcohol or isopropanol; ethyl alcohol or ethanol; carbon dioxide; dry ice; or dry shifting or sieve.
  • Hydrocarbon extractions, including: n-butane; isobutene; propane; or heptane.

Processors may only use solvents in the extraction process that are food grade or at least 99% pure. and Solvent-based extraction must be “completed in a commercial, professional grade, closed loop system capable of recovering the solvent used for extraction.”

Processed hemp products intended for human or animal consumption must be tested for cannabinoid concentration and profile, residual solvents, microbials, pesticides, and heavy metal concentrations. Testing must be performed by DNR or a testing facility authorized by DNR. Processors must retain records and prepare an annual report on the quantity of industrial hemp processed, identification of lot and batch numbers processed, disposition of all raw and processed industrial hemp, and records of all persons who received all raw or processed industrial hemp.

Retailer registration. A registered retailer may sell processed industrial hemp or industrial hemp products to consumers. In addition, retailers may import, store, and transport processed industrial hemp and industrial hemp products. Retailers must ensure that all products are labeled properly and must display a placard from DNR showing that it is a registered retailer. When applying for registration, a retailer applicant must provide a description of the type of store or operations of the retailer, a location or list of locations where industrial hemp will be offered for retail sale, and a list of products intended for sale. Like processors, retailers must keep records and submit annual reports to DNR.

Hemp Product Endorsement. In addition to registering growers, processors and retailers, DNR is also imposing regulations on all hemp products in Alaska. DNR must endorse “any hemp product processed beyond its raw form” that is intended for human or animal consumption before it is “transported in the state or offered with or without compensation to a consumer.” Retailers and processors can apply for an endorsement on an application provided by DNR. Endorsement applicants must provide the following:

  1. A color copy of the product’s proposed label;
  2. A copy of the laboratory test results of each product or batch of product;
  3. A copy of the processor’s DNR registration under or a copy of the processor’s registration or license from other states or qualifying entities that have implemented an industrial hemp pilot under the 2014 Farm Bill;
  4. A copy of the terpene analysis if required under the proposed rules; and
  5. An endorsement fee.

No processed industrial hemp product intended for human or animal consumption may contain more than 50 milligrams of delta-9 THC per individual product. Such products must also include the following items on their label:

  1. The product name;
  2. A batch and lot number for the product;
  3. An expiration date;
  4. The total quantity of the product by weight or volume;
  5. The serving size or recommended dose;
  6. A list of all ingredients;
  7. A statement that the product has not been approved by the Food and Drug Administration or the Alaska Department of Environmental Conservation.
  8. The industrial hemp pilot program from which the hemp originated;
  9. The industrial hemp pilot program that authorized the processing or testing of the industrial hemp in the product; and
  10. If the product conducts any delta-9-THC, the statement “warning: contains THC”.

Bottom Line. At this time, it is unclear when the DNR will start issuing registrations or will start endorsing products.

The most striking thing about the new rules is the endorsement and registration required for the sale of hemp products intended for human consumption, which almost certainly includes Hemp-CBD. On June 20, 2019, the DNR updated a “Questions and Answers” page on its website which indicates the scope of this registration:

Q: Are big stores such as GNC, Natural Pantry, all the gas stations going to have to get retail
licenses?
A: Yes. Except for a grower or processor selling raw industrial hemp, all retail sales of hemp and hemp products will require retail registration.

This may preclude the online sale of consumable Hemp-CBD in Alaska as retailer applicants must list the locations where they will sell hemp products and display a placard from DNR in their stores. Online retailers who sell directly to consumers won’t be able to comply with these location-based requirements.

Finally, these rules are focused solely on the 2014 Farm Bill and make no reference to the 2018 Farm Bill. That may need to change as a majority of states are going to be operating under the 2018 Farm Bill next year.

Interested stakeholders should carefully review these rules if they want to make any changes. DNR will be accepting public comments on the rules until 5:00 PM on Tuesday July 3rd, 2019. Comments can be submitted by email to industrialhemp@alaska.gov or online at http://notice.alaska.gov/, and using the comment link.

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Oregon Hemp: ODA’s New “Total THC” Standard is a KEY Operations and Contract Issue

Get it right with Total THC testing requirements.

In the past few months, many of our Oregon hemp clients have asked us to clarify the testing requirements imposed by the Oregon Department of Agriculture (“ODA”). Unlike other jurisdictions that only test for tetrahydrocannabinol (“THC” or “delta-9 THC”) concentration, the ODA rules provide that any industrial hemp product sold to consumers must contain no more than 0.3 percent “Total THC.”

Under Oregon hemp law, “Total THC” means “the molar sum of THC and THCA [tetrahydrocannabinolic acid].” This creates some very important considerations for hemp farmers and related parties, and, as explained below, failing to account for this issue in production and sale agreements creates serious exposure. But first, some background on the “Total THC” standard.

THC and THCA are two compounds commonly found in the cannabis plant. As its name indicates, THCA is an acidic cannabinoid, whereas THC is a neutral cannabinoid, meaning it possesses active (psychoactive) proprieties. While these compounds are present in different forms, they are linked in that when exposed to heat or lights THCA converts into THC. This conversion process naturally occurs over time but can also be enhanced through a chemical reaction called decarboxylation. Specifically, decarboxylation removes a carboxyl group of THCA and releases carbon dioxide which turns the large 3-D shape of the THCA molecule into a THC molecule, which is smaller and can fit into a body CB1 (cannabinoid) receptors.

A while back, the ODA suggested in one of its public announcements that the “Total THC” testing requirements aimed to align with the 2018 Farm Bill. The 2018 Farm Bill defines “hemp” as, in part, “acids, […] with a delta-9 tetrahydrocannabinol [(“THC”)] concentration of not more than 0.3 percent on a dry weight basis.” (Emphasis added). Consequently, the ODA posits that because THCA is an acidic cannabinoid that “contains” THC, it must be added to the THC concentration to ensure that their total concentration does not exceed 0.3 percent. However, opponents of the “Total THC” approach have described this rational as flawed in that THCA and THC are separate and distinct molecules. As such, THCA does not “contain” delta-9 THC. Instead, a chemical process converts a THCA molecule into a delta-9 THC molecule.

States like Oregon also support the “Total THC” position because the 2018 Farm Bill provides that States and Native American Tribes that wish to hold primary regulatory authority over the production of hemp within their borders must submit a plan that includes, among other things, “a procedure for testing, using postdecarboxylation or other similarly reliable methods, delta-9 tetrahydrocannabinol concentration levels of hemp produced in the State or territory of the Indian tribe[.]” Although there is no “postdecarboxylation” testing method per se, the congressional intent was apparently to refer to a testing method known as gas chromatography (“GC”).

The GC testing method consists of heating up a hemp sample to separate out its compounds and measure them. This method is powerful enough to decarboxylate THCA in a sample, which means that GC generates the very molecule it is measuring, and thus, calculates the “totality of THC concentrations” found in a hemp sample. Many in the hemp industry have criticized this method, as it tends to increase the THC concentration in the hemp sample and pushes it over the 0.3 percent limit. This, in turn, limits the type of strains farmers can work with and gives farmers in jurisdictions that only require the testing of THC a competitive edge.

But regardless of which position is most meritorious, Oregon hemp farmers and processors are obliged to comply with these ODA rules. As we have highlighted in several of our blog posts (here and here), hemp players must strategically and carefully plan when entering into a hemp-related contract. This careful approach mitigates their risks of financial loss and litigation. Consequently, Oregon hemp farmers and processors should account for the “Total THC” testing requirements in their transactional documents with the assistance of experienced hemp attorneys. For more information on hemp-related contracts and Oregon’s testing requirements, do not hesitate to contact our team of CBD attorneys.

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Hemp Contracts: What Business Can Learn from Oregon State’s New Research Facility

More hemp research makes for better hemp contracts.

Last Thursday, Oregon State University (“OSU”) officials announced plans to launch the Global Hemp Innovation Center (“Hemp Center”). The Hemp Center will be based in OSU’s College of Agricultural Sciences and intends to serve “as a research hub connecting faculty and researchers engaged in plant research, food innovation, pharmacy, public health, public policy, business and engineering.” You can read all about it here.

This is good news for folks in the hemp industry for a number of reasons as highlighted in this article about the Hemp Center by the Oregonian. The article notes the lack of standard units of measurement and seed certification programs, noting a case where Oregon farmers purchased hemp seeds having THC levels too high to be legal hemp. Professor of Crop and Soil Science, Jay Noller, who will head the Hemp Center, points out other goals that will benefit industry such as “how to efficiently and sustainably grow hemp for seeds, for hemp fiber materials that can be used in textiles and construction materials, including as an alternate to gravel in concrete, for hemp essential oils that have popular health and wellness uses, and for hemp grain for use in foods and feed.”

Let me add a few more reasons why the hemp industry should be thrilled about the Hemp Center. As regular readers know, we are writing more and more posts about hemp litigation and we have started publishing a 50-state survey of Hemp-CBD laws (first post: Alabama). Underlying these posts is our view that boilerplate contracts don’t work for hemp, just like they don’t work for marijuana. In our view, the work contemplated by the Hemp Center may lead to better hemp-CBD contracts, including on the issues such as:

  • What are best farming practices?
  • What is the quality of the seed?
  • What kinds of hemp have less than .3% THC?
  • What kinds of hemp have less than .3% “total THC”? (This is not a repeat.)
  • What CBD content might one expect at harvest from a particular strain?
  • What is a reasonable estimate for the cost per acre of cultivation for a particular hemp strain, in a particular geographic region?

These are not just research issues, but contract issues. Other hemp-related contract issues we’ve mentioned include, to name a few:

  • Who is responsible for maintaining the hemp chain-of-custody?
  • Who is responsible for procuring insurance (if any)?
  • Who is responsible for testing of hemp for human consumption or hemp items for other industries and to what standards?
  • Who bears what risk of regulatory changes?

Alright … the Hemp Center may not solve every contract issue 😊 Lastly, I think an exciting part about the Hemp Center is the promise of strategic global research and that the future of hemp looks even brighter with its launch. Kudos to Oregon State for being a first mover in this very promising space.

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