Month: June 2019

Oregon Hemp Litigation: Bad Contract = Big Federal Court Claims

One-page MOU for $7.5 million deal?!?

We frequently write on hemp litigation and the ways farmers and purchasers can mitigate the risks inherent in this new industry. Along with others, we have stressed the importance of strategic and careful thinking before entering into a hemp-related contract. Our cannabis lawyers frequently write and speak on these and related topics.

A couple of my recent posts have highlighted litigation arising after harvest. This post discusses a federal lawsuit filed last week in the District of Oregon, Jupiter Pharma, LLC et al. v. Lafayette Land Company, LLC, et al. that arises from a pre-harvest dispute between the parties. (Feel free to email me if you’d like a copy of the complaint.)

The lead plaintiff (Jupiter) is a Delaware limited liability company building a “Soil to Oil” industrial hemp/CBD operation in Oregon that includes the cultivation, processing and marketing of industrial hemp. The lead defendant (Lafayette) is a farmer residing in Oregon.

The parties entered into a contract in March 2019 to farm and cultivate industrial hemp for the 2019 season that included, at Jupiter’s option, the 2020 and 2021 seasons. Lafayette agreed to farm and cultivate approximately 950 acres of hemp and agreed to assign to plaintiffs its interests in two specific parcels of land to be used for cultivating industrial hemp. In exchange, Jupiter agreed to pay defendants $7.5 million for delivery of at least 2 million pounds of biomass and to transfer to Lafayette farming equipment purchased by the plaintiffs, which equipment would be credited against the $7.5 million payment obligation. Jupiter also agreed to pay Lafayette certain incentives based on hemp production and a monthly stipend during the growing season.

After entering the contract, Lafayette allegedly failed to provide the required documentation concerning the assignment of interests for the two parcels of land. Jupiter then made several trips to the farm to discuss the project and operations. During these visits, Lafayette allegedly made representations that he would provide the land and farm it for plaintiffs. Meanwhile, Jupiter has allegedly entered into contracts with third parties worth $15 million to build a CBD processing facility and purchase equipment per the contract as well as invested over $1 million into the project.

The gravamen of the complaint is that Lafayette repudiated the alleged hemp production contract in late May 2019 and in early June 2019 began planting hemp seed for a third party in violation of the contract with Jupiter. The complaint is quick to note that the Oregon hemp growing season begins in June and if not planted, Jupiter’s season will be lost. The complaint alleges this will cause Jupiter to lose its significant investments in the project and that Jupiter cannot secure alternative farm lands for the 2019 season.

The complaint seeks declaratory relief (a ruling that the contract is enforceable) as well as injunctive relief and specific performance (forcing Lafeyette to assign the rights in the land). In the alternative, Jupiter alleges Lafayette defrauded it by inducing it to enter a contract for the production of hemp and seeks no less than $1 million in damages.

So is there an enforceable contract? The contract is titled a “Memorandum of Understanding” (MOU). This could be better for Jupiter—one Oregon appellate decision, citing Farnsworth’s treatise, notes: “On the problem of determining whether contracting parties intend to bind themselves either in the presence or absence of terms such as ‘letter of intent’ and ‘memorandum of understanding,’ it has been said, ‘It would be difficult to find a less predictable area of contract law.’” The title of the document does not control, however, the ultimate question being whether there was a meeting of the minds as to the terms of the deal supported by consideration. In this regard, the MOU seems reasonably definite. But litigation sure is an expensive way to get an answer to the question of enforceability.

A few other comments on the MOU. It is a short, one-page document for a purported $7.5 million deal with kickers for a biomass harvest exceeding 2 million pounds. (Maybe the defendants believed they found a better deal elsewhere?) The MOU says nothing about THC content or CBD content of the hemp. Nothing about the risk of the USDA deciding not to approve Oregon’s hemp production plan. Nothing about state record-keeping requirements or who is responsible for testing of hemp for human consumption – presumably the goal of this Seed-to-(CBD)Oil business or about the chain-of-custody of documentation to ensure nothing is seized during shipment or what happens if Oregon suspends or revokes Lafayette’s license to grow hemp. Notably, the MOU contains no express deadline by which Lafayette must deliver evidence of the purported assignments of agricultural land. I hate to be too critical of the MOU, but there seems much here that could have been done differently and, perhaps, better.

Stay tuned for updates.

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Washington CBD Webinar June 19: Hemp-Derived CBD Locally and Nationwide

On June 19, 2019, at 1:30 PST, the Washington State Bar Association’s Cannabis Law Section will be presenting an online CLE on hemp. I’ll be joined by my esteemed colleagues to shed some light on hemp laws both nationally and here in the Evergreen State. You can register to join us here.

We’ll cover a host of topics, but will start with the 2014 Farm Bill, which first allowed for the legal cultivation of industrial hemp for research purposes. Under the 2014 Farm Bill, state departments of agriculture and universities could undertake agricultural pilot programs to permit the cultivation of hemp. Some states also license the processing of hemp. The hemp industry as we know it is the result of this piece of legislation.

For more on the 2014 Farm Bill, take a look at the following:

We’ll then turn to the 2018 Farm Bill, which does not immediately repeal the 2014 Farm Bill. The 2014 Farm Bill will remain in place for at least a year after the U.S. Department of Agriculture (USDA) issues regulations under the 2018 Farm Bill. The 2018 Farm Bill’s main focus when it comes to hemp is cultivation. It provides detailed guidelines for states to create their own plans to regulate the cultivation of hemp. It also allows the USDA to set federal standards for hemp cultivation to be used in states that do not have an approved plan but also have not prohibited hemp cultivation under state law. The 2018 Farm Bill also removed hemp from the Controlled Substances Act, clarifying that hemp is a regulated agricultural commodity, not a controlled substance like marijuana.

Here is some additional reading on the 2018 Farm Bill:

At this point, we’ll talk about Washington State, where lawmakers have just overhauled the entire hemp program. The Washington State Department of Agriculture (WSDA) oversaw hemp under the 2014 Farm Bill and will continue to do so under the 2018 Farm Bill. We’ll talk about how this new legislation allows for broader commercial activities and provide insights as to how the WSDA plans to regulate the industry going forward. We’ll also cover how Washington stands to fare in the hemp-derived CBD market under this new law.

For more on Washington hemp, check out the following:

No hemp presentation would be complete without some talk about the Food and Drug Administration (FDA). The FDA regulates food, drugs, dietary supplements, cosmetics, and a whole host of other consumable goods. The FDA’s position with hemp and more specifically Hemp-CBD is. . . complicated. The FDA has said that Hemp-CBD can’t be added to food or dietary supplements and that it can only be marketed as a drug if investigated and approved as a new drug. The FDA has approved of Epidiolex, which contains CBD, for treating epilepsy. It has also determined that three hemp seed ingredients are generally regarded as safe for use in foods. Other than that, the FDA’s relationship with other CBD products has been hostile though it has not yet passed any final rules on the topic.

More on FDA is available here:

We’ll wrap up our conversation by providing some tips on how to advise businesses in this complicated space. We’ll even touch on distributing Hemp-CBD products across state lines. Our program will be focused on attorneys, who can receive CLE credits for attending, but the information that we cover is applicable for anyone operating in this market.

For some examples, take a look at the following:

Speaking on behalf of the Cannabis Law Section’s executive board, I sincerely hope you can join us! Feel free to comment below with questions you would like addressed and we’ll do our best to answer them in our presentation.

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Notes on the First Public FDA Meeting on CBD

Last Friday, May 31, the Food and Drug Administration (“FDA”) held its first public meeting during which stakeholders shared their perspective on how to regulate cannabidiol (“CBD”)-infused products. The objective of the meeting was to gather scientific data and information about the safety, manufacturing, product quality, marketing, labeling and sale of these products.

As we have explained in previous blog posts (here and here), the FDA currently treats the sale and marketing of CBD-infused food and dietary supplement in interstate commerce as unlawful because CBD was approved as a drug by the agency before it was marketed as a food or a dietary supplement. Accordingly, CBD cannot be marketed simultaneously as a food/dietary supplement and a drug.u

Although nothing groundbreaking came out of the nearly 10-hour long meeting, we thought it would be interesting to highlights some of the major topics discussed during this meeting.

Several hemp and cannabis organizations, including the U.S. Hemp Roundtable, argued that the FDA should allow the sale of hemp-derived CBD-infused products given the congressional intent behind the 2018 Farm Bill, which legalized hemp and its derivatives. In addition, the U.S. Hemp Roundtable mentioned ongoing efforts with lawmakers to draft legislation that would regulate hemp-derived CBD-infused products in the event the FDA concludes that it cannot design a regulatory framework on its own. This scenario seems plausible given Former FDA Commissioner Scott Gottlieb’s statement that Congress may hold the key to legalizing CBD-infused products by issuing additional legislation that expressly allow the use of Hemp-CBD in foods. Indeed, while the intend of Congress was undeniably to legalize the production of crop and its derivatives, Congress did not define the term” production,” thus leaving open for interpretation whether the sale of hemp-derived CBD-infused products is legal.

Supporters of hemp-derived CBD-infused products also suggested that these products be regulated under the existing dietary supplement framework, where products are intended for non-medicinal purposes.

While some speakers expressed concerns regarding the sale of cannabis-infused products; their concerns were primarily directed at marijuana-infused products.

State regulators discussed the need for FDA guidelines in regulating these products.

Specifically, Brenda Morris, Florida Department of Agriculture and Consumer Services, discussed the “patchwork of laws” surrounding CBD products that has created an environment in which “anything is allowed.”

Pam Miles, a representative of the Virginia Department of Agriculture, raised the lack of scientific evidence regarding CBD products and urged the FDA to take the lead on this issue:

Currently, states are struggling with the lack of sound scientific research available in CBD and long-term health impacts, including those to children’ and that her department “is hopeful that FDA will begin to supply significant leadership as it related to CBD, including research related to its health impacts.”

Health and consumer advocates also weighed in on the issue and expressed concerns regarding the lack of scientific research needed to substantiate claims about the therapeutic value of CBD in treating various illnesses, including Alzeimer’s, dementia, and epilepsy – despite the FDA approval of Epidiolex.

Others stressed the need to adopt terminology, manufacturing and standards for these products in order to protect the consumer and avoid a public health crisis.

While speakers had various opinions regarding how stringent those rules and regulations should be, all agreed that a regulatory framework was needed immediately. The FDA has previously declared that creating a framework for allowing CBD into the food supply would take sometime; however, the agency is hoping to share information and/or finding with the public, as Gottlieb explained in his April 2 statement, as early as this summer (but no sooner than July 2, which is the last day to submit public comments).

Until then, the CBD industry will need to continue navigating through these murky waters.

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